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1 MILBERG WEISS BERSHAD HYNES & LERACH LLP 2 WILLIAM S. LERACH (68581) THOMAS E. EGLER (189871) 3 401 B Street, Suite 1700 San Diego, CA 92101 4 Telephone: 619/231-1058 619/231-7423 (fax) 5 - and - PATRICK J. COUGHLIN (111070) 6 RANDI D. BANDMAN (145212) SYLVIA WAHBA (197612) 7 ELI R. GREENSTEIN (217945) 100 Pine Street, Suite 2600 8 San Francisco, CA 94111 Telephone: 415/288-4545 9 415/288-4534 (fax) 10 Lead Counsel for Plaintiffs 11 UNITED STATES DISTRICT COURT 12 NORTHERN DISTRICT OF CALIFORNIA 13 OAKLAND DIVISION 14 15 In re APPLE COMPUTER, INC. SECURITIES ) Master File No. C-01-3667-CW LITIGATION ) 16 ) CLASS ACTION ) 17 ) FIRST AMENDED CONSOLIDATED This Document Relates To: ) COMPLAINT FOR VIOLATION OF THE 18 ) SECURITIES EXCHANGE ACT OF 1934 ALL ACTIONS. ) 19 ) DEMAND FOR JURY TRIAL 20 21 22 23 24 25 26 27 28 Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 2 of 116

1 TABLE OF CONTENTS 2 Page 3 4 I. OVERVIEW ...... 1 5 A. The G4 Cube ...... 3 6 B. The Power Mac ...... 7 7 C. The K-12 Educational Sales "Train Wreck" ...... 9 8 D. Apple's Financial Health and 4Q00 Prospects ...... 11 9 E. Inventory Levels and Gross Margins ...... 12 10 F. Other Issues ...... 13 11 II. INTRODUCTION ...... 14 12 III. JURISDICTION AND VENUE ...... 20 13 IV. PARTIES ...... 20 14 V. BACKGROUND TO THE CLASS PERIOD ...... 22 15 VI. DEFENDANTS' WRONGFUL COURSE OF CONDUCT AND FALSE AND MISLEADING STATEMENTS ...... 25 16 A. False Statements Made During Macworld New York: July 18-19, 2000 ...... 25 17 1. False Statements Made During Jobs' Speech and Investor Conference 18 Calls ...... 25 19 2. July 20: Media Reaction ...... 28 20 3. July 20: Investment Analyst Reaction ...... 30 21 4. July 25-31: Magazine Reaction ...... 35 22 5. Summary of Apple's July 2000 False and Misleading Statements ...... 39 23 B. Reasons Why Apple's Macworld Statements Were False and Misleading When Made ...... 39 24 1. Apple's Undisclosed Product Problems ...... 40 25 a. The G4 Cube: Pre-Macworld Design and Production Problems ..40 26 b. Post Macworld: Cube Problems Intensify in August and 27 September 2000 ...... 45 28 c. The Power Mac ...... 52

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1 Page 2 d. The iMac ...... 56 3 2. Apple's July 18, 2000 Statement that Its K-12 Sales Force Transition 4 Had "Progressed Nicely" Was False When Made ...... 57 5 a. The Role of Apple's Agents ...... 57 6 b. The Consequences of Apple's Decision to Fire Its Agents .....59 7 3. Apple's Knowledge that the K-12 Education Sales Force Transition Had Not "Progressed Nicely" as of July 18, 2000 ...... 61 8 a. Jobs' Admissions ...... 61 9 b. Apple's Knowledge Based on Its Real-Time Education Sales 10 Tracking System ...... 62 11 4. Apple's Knowledge that Its 4Q00 Financial Projections Had No Reasonable Basis ...... 65 12 C. Post-Macworld: Further False and Misleading Statements ...... 69 13 1. August Statements ...... 69 14 2. Late August Statements ...... 69 15 3. August 25-30: Top Apple Executives Bail Out ...... 72 16 D. Reasons Why Apple's August 2000 Statements Were False and Misleading 17 and Apple Knew It ...... 73 18 1. Statement that "Both Back-to-School and Education Sales Have Accelerated as Seasonally Expected"...... 73 19 2. Statements that Apple Was "Comfortable" and "On Track" to Deliver 20 $2.0+ Billion and $0.45 EPS ...... 74 21 3. Statements that Inventory Was Being Effectively Managed and "Pricing Actions on Older Inventory Have Already Been Taken and the 22 Company Does Not Anticipate Needing to Take Additional Action in FQ4" ...... 76 23 4. Statement that Apple Was "On Its Shipment and Availability Plan" .....79 24 5. Statements that Cube Orders Were "Strong," Customer Acceptance 25 Was "Good," the Cube Would "Drive the Quarter" and Apple Had Sold "Tens of Thousands" of Cubes ...... 79 26 E. September Statements ...... 80 27 1. September 13, 2000: Jobs' Statements in Paris and During CNBC 28 Interview ...... 81

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1 Page 2 2. September 21, 2000: Questions Start ...... 82 3 3. September 28, 2000: Morning – All Is Rosy ...... 82 4 F. Reasons Why Apple's September Statements Were False and Misleading and 5 Apple Knew It ...... 83 6 1. Jobs' Statements that He Was "Extremely Happy" with Sales of the G4 Cube; that the New Products Gave Apple "the Strongest Product Line 7 Apple Has Ever Had;" and that a Rumored Cube Shortage Was Because "Demand Was Greater than We Thought It Would Be" ...... 83 8 2. Apple's Statements that: (a) It "Remains Comfortable with Consensus 9 FQ4 Revenues Expectations" (September 6, 2000); (b) Back-to- School Demand Has "Accelerated as Expected" (September 6, 2000); 10 (c) Apple's 4Q00 Was "Tracking on Plan" (September 8, 2000); and (d) Apple Would "Hit" Its 4Q00 Forecasts (September 13, 2000) .....84 11 VII. ADVERSE FACTS BEGIN TO COME OUT ...... 84 12 VIII. INSIDER STOCK SALES ...... 97 13 A. Apple's Senior Officers' Stock Sales Were Unusual and Suspicious ...... 97 14 B. Options Valuation Provides Additional Evidence of Scienter ...... 105 15 C. Statistical Analysis Provides Additional Evidence of Scienter ...... 109 16 IX. CLASS ACTION ALLEGATIONS ...... 110 17 X. NO SAFE HARBOR ...... 111 18 XI. CLAIM FOR RELIEF ...... 112 19 XII. PRAYER FOR RELIEF ...... 113 20 XIII. JURY DEMAND ...... 114 21 22 23 24 25 26 27 28

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1 I. OVERVIEW 2 1. This First Amended Consolidated Complaint ("Amended Complaint") asserts facts 3 demonstrating that defendant Apple Computer, Inc. ("Apple" or the "Company") and its employees made 4 false and misleading statements regarding its new products, education sales and Apple's overall financial 5 condition between July 19, 2000 and September 28, 2000 (the "Class Period"). The false and misleading 6 statements began at meetings and presentations held in connection with the annual "Macworld" Conference 7 (July 18-19, 2000), and ended with an Apple press release admitting that its fiscal year-end quarter 8 ("4Q00") would be a disaster for the Company (September 28, 2000). Just two weeks before the bad 9 news hit, Apple's Chief Executive Officer ("CEO") Steven P. Jobs ("Jobs") reassured investors, telling an 10 interviewer on CNBC that he was "extremely happy" with sales of the Power Mac G4 Cube ("G4 Cube" 11 or "Cube") and that Apple's new products gave it "the strongest product line that Apple has ever 12 had." When asked point-blank about a rumored shortage of Apple's G4 Cube, Jobs stated that Apple 13 had already shipped "many tens of thousands" of Cubes. Jobs ended the interview by stating "I think 14 we're going to hit our forecasts this quarter, so if [G4 Cubes] are hard to find, I think that's 15 because demand is greater than we thought it would be...."1 Two weeks later, Apple announced 16 what later turned out to be a 25% earnings per share ("EPS") miss, a close to 2% gross margin miss, and 17 a $180 million revenue shortfall, $90 million of which was directly attributed to lower than expected G4 18 Cube sales. 19 2. Apple's misrepresentations during the Class Period primarily related to: 20 (a) Apple's three new products: the G4 Cube, the Power Mac G4 Dual Processor 21 ("Power Mac"), and updated versions of the iMac; 22 (b) A major overhaul of Apple's sales model for K-12 schools; 23 (c) Apple's component part and finished goods inventories; and 24 (d) Apple's financial health and prospects for 4Q00 and fiscal year 2001 ("FY 01"). 25 26

27 1 As Apple's CEO, Jobs is named only as a "control person" defendant under §20(a) of the Securities Exchange Act of 1934 ("Exchange Act") because he possessed the power and authority to cause 28 Apple to engage in the wrongful conduct alleged herein. See ¶¶272-273 (second claim for relief). FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 1 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 6 of 116

1 3. The facts plead, which are based in part on information provided by 39 confidential 2 witnesses ("CWs"), show that Apple's top executives knew about severe problems plaguing every 3 important business area upon which Apple based its positive statements and 4Q00 financial forecasts. The 4 facts plead also show that the officers making the statements were personally kept appraised of the status 5 of such problems. 6 4. On December 11, 2002, this Court dismissed plaintiffs' Consolidated Complaint with leave 7 to amend (the "Order"). In its Order, the Court found that although plaintiffs "plead the existence of 8 extensive problems" with the Cube, and showed other product problems, the complaint lacked the evidence 9 showing exactly how defendant Apple knew, or consciously disregarded those problems. Order at 24-25. 10 5. The Court focused primarily on statements made by Apple employees at Macworld on July 11 18-19, 2000. See, e.g., Order at 24 (discussing whether "Apple knew, when announcing its July forecast, 12 that fewer Cubes than projected would be sold"), Order at 27-28 (discussing [Apple Controller Peter] 13 "Oppenheimer's comment [regarding the K-12 sales program] during the July 18, 2000 conference call"). 14 The Order also mentions, but does not fully analyze, various statements made after Macworld (the last of 15 which Jobs made two weeks before acknowledging Apple's huge 4Q00 financial shortfall). Order at 8-9, 16 13. In any event, plaintiffs have added detail showing how Apple's top executives knew about the severe 17 problems plaguing its new products, education sales and financial health, all of which rendered its July 2000 18 forecasts unreasonable and its August-September 2000 statements false. 19 6. The Court also addressed other issues, including Apple's bespeaks caution defense, 20 standards for pleading confidential witnesses and statements made through third parties. As to the first, the 21 Court found that purported "cautionary statements" made in "Apple's 1999 Form 10-K, its 3Q00 Form 22 10-Q and the July 18, 2000 teleconference [held at Macworld]" were either "irrelevant" or "insufficient" 23 to provide "safe harbor" or "bespeaks caution" protections to defendants. Order at 21-23. Further, the 24 Court confirmed that the descriptions used to denote the confidential witnesses sufficed (although plaintiffs 25 were required to show the witnesses' basis for certain information). Order at 26. Additionally, the Court 26 found that statements made to and repeated by the media, stock analysts and other "third parties," were 27 actionable stating: "the fact that Defendants hosted media events, such as Mac World, held meetings and 28 conference calls with analysts and participated in interviews is sufficient to show that Defendants intended

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1 that their statements be communicated to the market." Order at 29-30. Thus, the Court found that "the 2 third party statements may ... be properly relied upon in the complaint." Order at 29-30. 3 7. This new Amended Complaint now demonstrates more fully how defendant Apple and its 4 relevant officers knew that Apple's 4Q00 financial forecasts had no reasonable basis and that subsequent 5 positive statements of present business condition were false. 6 8. Apple based its 4Q00 financial forecasts and subsequent false statements on what it termed 7 would drive the quarter's results: (a) Apple's new products, including the G4 Cube, Power Mac and iMac; 8 (b) Apple's education sales (which historically accounted for nearly one-third of Apple's revenues); and 9 (c) Apple's lean inventory position. ¶¶65-67, 70-71, 73-80, 84-86, 174, 177-179. Throughout the Class 10 Period, Apple made positive statements about all three business components to support its 4Q00 11 projections. What Apple did not disclose, however, was that all three components suffered from 12 catastrophic problems which rendered its statements plainly false and its announced financial expectations 13 without reasonable basis.2 The Amended Complaint sets forth the details showing Apple's top officers 14 knew of the problems throughout the Class Period. 15 A. The G4 Cube 16 9. The Court found that "most of the many statements about the Cube Plaintiffs cite ... are 17 generic expressions of optimism insufficient to support a securities fraud claim." Order at 23. However, 18 when the Court addressed plaintiffs' "central theory - - that Apple knew, when announcing its July forecast, 19 that fewer Cubes than projected would be sold," the Court found that "Plaintiffs have pled the existence 20 of extensive problems with the Cube." Order at 24. 21 10. The Court required more detail, however, about "Defendants' knowledge of these defects." 22 Order at 24. Though the detail in the Consolidated Complaint included public admissions from Apple 23 employees as well as information from confidential witnesses regarding CEO Jobs' access to "internal 24

25 2 The Court's Order analyzed the falsity of Apple's 4Q00 forecasts by separately assessing the allegations regarding the G4 Cube, the Power Mac, the iMac, K-12 education sales and 26 component/finished goods inventory, in isolation. However, the basis for Apple's forecasts, reasonable or not, and Apple's subsequent reiterations of those forecasts, depended on the combination of the success 27 or failure of all of Apple's new product lines, education sales and its inventory position during 4Q00. As set forth herein, the combination of problems known by Apple made its 4Q00 forecasts impossible to 28 meet. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 3 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 8 of 116

1 reports [and] data tracking systems," the Court ordered that "Plaintiffs must allege something approaching 2 actual knowledge on the part of Jobs or other Apple officers who made statements regarding the 3 company." Order at 24-25. 4 11. The Court also noted that Jobs' alleged acknowledgment of the problems as early as June 5 2000 during a college-level reseller "boot camp," were insufficient to show that at that time, and later at 6 Macworld, Jobs knew the problems would not be solved. Order at 25 n.7. The Amended Complaint now 7 details more than 20 former Apple employees or witnesses personally familiar with the Cube's design and 8 production defects, including Apple's Materials Manager for the G4 product line during the Class Period 9 (CW37), who "frequently" observed CEO Jobs at the Cube's main development lab (located on Apple's 10 main campus in Cupertino, California) between May and August 2000. ¶164. According to CW37, Jobs 11 visited the lab at a minimum of once a week during that time. ¶164. Further, CW37 details how Bernie 12 Trango ("Trango"), Apple's Lead Manufacturing Coordinator, provided CEO Jobs with current status 13 updates on the Cube's development progress and that Apple lead engineers had one-on-one conversations 14 with Jobs between May 2000 and August 2000 regarding the cosmetic problems in the Cube's case. 15 ¶164. Jobs also applied great pressure on the team leaders at the meetings, frequently resorting to 16 emotional outbursts due to the Cube's failures and delays. ¶164. CW37 stated that he/she received daily 17 status reports regarding Cube development after he/she arrived in May 2000, and that both Jobs and 18 Jonathan J. Rubinstein ("Rubinstein"), Apple's Senior Vice President of Hardware 19 Engineering, were copied on the status reports. ¶164. After the Cube was released for production in 20 August 2000, CW37 stated that Jobs was also kept aware (September 2000 and beyond) of the Cube 21 supply problems. ¶166. A former contract Technical Support Representative (CW35) confirmed that 22 Apple had a very detailed internal communications process with respect to G4 Cube problems and that 23 Jobs was copied on nearly all of these communications. ¶170. 24 12. Another ex-Apple employee, Senior Project Design Manager for the G4 Cube (CW5), 25 reported that Jobs also attended meetings with senior industrial design personnel during the Class Period 26 and was given substantive presentations regarding Cube design engineering and development 27 challenges, including being personally shown G4 Cube units with cosmetic imperfections. ¶167. CW5 also 28 stated that Jobs was copied on all critical reports submitted by Apple's industrial design teams. ¶167.

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1 13. The Amended Complaint now shows that whatever hopes Jobs held in June 2000 were 2 not reasonable at Macworld, as the problems persisted into July 2000 and got substantially worse in August 3 2000, when at least two major shipping defects came to light. ¶¶106-108, 110, 119-120, 185; Ex. E. 4 With the new information detailing Jobs' personal involvement and attention to the Cube's problems 5 throughout the summer into September 2000, the Amended Complaint now shows that the Apple officers 6 making false statements were aware of the problems. 7 14. The Amended Complaint also contains additional information and documents showing that 8 Apple was aware of the problems plaguing its products: 9 - Information from a former AppleCare Representative (CW38) corroborating the testimony of former Apple Frontline Technical Support Representative (CW9) and providing more 10 detail about the rare August 2000 memo (the "Product Defect memo") which acknowledged the Cube and Power Mac problems and provided specific directions for 11 addressing customer complaints. CW38 stated that the memo came from Rubinstein's office (Senior Vice President of Hardware Engineering). ¶112. 12 - Information from a former Apple Test Engineer (CW26) and a former Apple Rework 13 Technician (CW27) detailing how, prior to the Class Period, the motherboard design for the Cube caused the product to overheat, and in some cases to catch fire after being 14 turned on for two hours. ¶¶95-96. More importantly, a comprehensive redesign of the flaming motherboard was attempted prior to the release of the Cube, but was not available 15 until after the Class Period. ¶¶95-96. 16 - Information detailing the critical parts supply problems Apple faced before and after the Cube introduction. ¶¶97, 103-105. The person in charge of Cube materials during the 17 Class Period (CW37) noted that there were daily reports emailed to Apple's Senior Vice President of Worldwide Operations Timothy D. Cook ("Cook"), who reported directly 18 to Jobs, detailing specific material shortages and production quantities. ¶¶103, 166. Further, three additional witnesses (CW31-33) confirm the Cube supply problems during 19 the Class Period. ¶104-105. 20 - A copy of an Apple document dated August 15, 2000, and posted on the Company's customer help website, attempting to minimize the known problems with the "surface lines 21 on the plastic enclosure of the Power Mac G4 Cube computer," the extent of which was only known to Apple. ¶185; Ex. D.3 22 - A copy of an Apple document dated September 1, 2000, and posted on the Company's 23 customer help website, which minimized the power switch problem noting "The DC-to-DC converter card in the Power Mac G4 Cube computer may move slightly out of its 24 connector during shipping, causing the computer not to turn on when the power button is touched." ¶185; Ex. E. 25 26 3 These documents in no way expose the overall extent of the problems known to Apple and its 27 officers who specifically reaffirmed sales and specific revenue targets up to two weeks before missing EPS numbers by 25%. The documents do provide real-time support for the information provided by 28 confidential witnesses. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 5 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 10 of 116

1 - A copy of an Apple document dated a few days after the Class Period (October 3, 2000) and posted on the Company's customer help website, admitting the defect in the Cube's 2 power switch which caused the computer to "turn off or go to sleep" when it was already on, or "turn on or wake up" when the unit was off. ¶185; Ex. F. The document stated that 3 Cubes may require "the replacement of the power button gasket." The document indicates that the Cube's defective power switch was not fixed during the Class Period and 4 corroborates the testimony of a former Apple Rework Technician (CW27), who confirmed that an effective solution was not implemented until after the Class Period. 5 ¶108. 6 - A copy of an Apple document dated February 22, 2001, and posted on the Company's customer help website, entitled "PowerMac G4 Cube: Replacing the Power Button 7 Gasket." The document details the gasket replacement for the defective power switch. ¶185; Ex. G. According to CW11, this procedure also required some customers to ship 8 the new Cube back to Apple for repair. ¶108. The document confirms that the Cube power switch problem was still not fixed long after the Class Period. 9 - A copy of an Apple document entitled "Power Mac G4 Cube: Replacing the 10 Enclosure" dated June 7, 2001, and posted on the Company's customer help website. The document instructed Cube customers on how to physically replace the defective 11 plastic enclosure. ¶108; Ex. H. This document indicates that the Cube was still plagued by cosmetic defects until well after the Class Period. 12 15. Thus, the Amended Complaint sets forth sufficient information about the prevalence of what 13 the Court called "extensive" Cube problems, as well as Apple's actual knowledge of the problems plaguing 14 the Cube. As to the impact of the product problems, Apple itself asserted the new products would drive 15 the expected 4Q00 increase in revenue and EPS (¶¶66-67, 70-71, 73-80, 84-86, 174, 177-179) and was 16 specific as to the numbers. Apple expected: (a) $2 billion in revenue with a flat tax rate; (b) a 2.3% decline 17 in gross margins (26.8% to 27.8%); and (c) an increase in expenses by $15 million equating to a $0.40+ 18 EPS. ¶63. To reach these numbers, Apple had to manufacture and sell 150,000 commercially acceptable 19 Cubes. ¶178. As the Amended Complaint sets forth, however, the problems were so severe and 20 persistent that Apple missed this number by one-third (43,000 Cubes), causing a $90 million shortfall in 21 revenue. ¶218. Apple itself admitted that the shortfall was due to a "slower than expected start" in Cube 22 sales. ¶208. 23 16. The Amended Complaint thus sets forth the who, what, why and when as well as the 24 specific impact of the Cube's problems and how Apple executives knew. The who: Jobs making glowing 25 statements about the Cube and affirming earlier revenue guidance right through September 2000. ¶¶70-71, 26 73-81, 85-86, 178-179, 200-201. The what and why: the G4 Cube and Apple's inability to mass- 27 manufacture it in quantity due to the severe cracking of the enclosure, shortage of component parts and a 28

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1 faulty power switch. ¶¶89-122. The when: beginning in the summer of 2000 and continuing through 2 August and September 2000. ¶¶89-122. The impact: the Cube was, according to Apple, expected to 3 drive an increase in revenue and EPS. ¶¶66-67, 70-71, 73-80, 84-86, 174, 179. Instead, the shortfall 4 in Cube sales (107,000 versus 150,000) resulted in a $90 million miss which Apple admitted was due to 5 a "slower than expected start" in Cube sales in 4Q00. ¶¶108, 218. Finally, the knowledge: Jobs visited 6 the Cube's design labs at a minimum of once per week to discuss the problems, was personally shown 7 flawed Cubes, received frequent personal updates and daily reports on Cube progress, and was personally 8 kept informed of Cube progress and supply issues after it was defectively released. ¶¶164, 166-167, 9 170-171. On July 3, 2001, less than one year later, Apple discontinued the G4 Cube. ¶225. 10 B. The Power Mac 11 17. As the Court noted, the Consolidated Complaint contained detail regarding "a 12 memorandum about handling problems with the Dual Processor and Cube [sent] to frontline technicians 13 in 'early August 2000.'" Order at 10 (citing Consolidated Complaint at ¶91). 14 18. The Court found that the "allegations about the exact number of customers affected might 15 not be necessary in light of Plaintiffs' allegations regarding Apple's technical memo on Dual Processor 16 defects." Order at 27. The Court noted, however, that "Plaintiffs do not allege that Jobs was deliberately 17 reckless as to these defects and the effect they would have on Dual Processor sales when he made his Mac 18 World speech." Order at 27. 19 19. The Amended Complaint contains the required detailed allegations. In addition to adding 20 another former Apple employee who received the Product Defect memo from Rubinstein's office in August 21 2000 (former AppleCare Representative (CW38)) (¶112), the Amended Complaint shows that within 72 22 hours of the July 2000 Macworld convention (even sooner than previously alleged by plaintiffs), Apple 23 posted a document on its website which minimized but acknowledged one of the Power Mac's problems: 24 that only programs written specifically for the computer's architecture would benefit from the dual processor 25 technology. ¶185; Ex. I. 26 20. The document, dated July 21, 2000, explained "how applications not optimized for dual 27 processors run on a Power Mac G4 (Gigabit Ethernet) computer with dual processors": 28

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1 An application that is not optimized to utilize both processors in a Power Mac G4 (Gigabit Ethernet) computer will function just as if it were running on a single processor 2 computer. 3 Mac OS X, and applications written specifically for Mac OS X, are optimized for dual processing. 4 21. While originally scheduled for release with the Power Mac, however, the new Mac OS 5 X was not released until March 24, 2001 – more than eight months later, substantially after the Class 6 Period.4 Further, only a handful of applications written in the then-available OS 9 could make use of the 7 dual processors, and those programs required users to make substantial investments in software that was 8 sure to become obsolete when the non-backward compatible OS X was released. ¶¶124-125. 9 22. Therefore, customers had no incentive during Apple's 4Q00 to purchase the new Power 10 Mac or the high-end Cubes equipped with dual processors. Apple knew this, but investors were not aware 11 that Jobs' statements about the abilities of the Power Macs were misleading because the hardware in the 12 computer lacked the software to use its full potential. 13 23. Indeed, multiple former Apple employees, including a former contract Technical Support 14 Representative employed by Apple (CW35), confirmed the negative impact, detailing how customers 15 consistently complained about the slow speeds of their premium investment and performance limitations 16 of the dual processor. ¶¶132-133, 135. The Power Mac defects further compounded the 17 unreasonableness of Apple's 4Q00 forecasts, causing a revenue miss of $30 million and contributing to a 18 gross margin miss of close to 2.0%. ¶218. Again, the Amended Complaint is specific as to the problems, 19 timing and impact. There is no question Apple knew that OS X was not ready, and thus, expectations 20 based on Power Mac sales were not reasonable. But what was without basis in July 2000, was known 21 to be false in September 2000, as Jobs continued to assert Apple would meet its numbers. ¶¶200-202. 22 C. The K-12 Educational Sales "Train Wreck" 23 24. As set forth in the Consolidated Complaint, CEO Jobs supplied the best detail regarding 24 the disastrous third-party sales agent transition in an interview with Fortune magazine after the Class 25 Period. In the interview, Jobs admitted that Apple's switch from third-party sales agents to a direct sales 26 27 4 According to CW11 (former Apple Support Services Manager), Apple originally planned to 28 release OS X in 2000 in conjunction with the Power Mac launch but was late to market. ¶125. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 8 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 13 of 116

1 model in July 2000 had catastrophic consequences on K-12 sales at the time the change was made. Jobs 2 stated: 3 The problem was, we were very straightforward and told these third-party salespeople ahead of time that, "Hey, in four months we're going to switch and you're going to be out 4 of a job." Obviously these folks did everything they could to sell as much as they could by June 30, when we let them go, and did absolutely nothing to build for sales in the 5 July quarter. So when our new sales folks got there, they found there was no pipeline work at all; they had to start from scratch. And, duh, this was during the peak 6 buying time for schools. It was just stupid on our part to do this then, and that was my decision. It was a train wreck, and it was totally my fault. 7 ¶224. While watching the internal "train wreck" happen, Apple representatives spoke as though the 8 transition was no problem. At Macworld (nearly three weeks after the agents were gone) Apple 9 Controller Peter Oppenheimer ("Oppenheimer") said that the sales transition had "progressed nicely." ¶65. 10 As admitted by Jobs, this was untrue, because when the new agents took over at the end of June 2000, 11 July 2000 sales had already been cannibalized and there was no July sales pipeline to work with. ¶¶154- 12 162, 224. 13 25. Later in the Class Period, Apple representatives met with stock analysts at Prudential, who 14 published a report on August 23, 2000. In light of Jobs' "train wreck" comment to Fortune, the August 15 23, 2000 Prudential report had an ironic title: "Business on Track." ¶177. Even more ironic given what 16 actually occurred, the Prudential analyst stated that "Management noted that both back-to-school and 17 education sales have accelerated as seasonably expected."5 18 26. Yet education sales had not. Here, the Amended Complaint is packed with details about 19 the negative drop in education sales, admittedly because the sales force Apple had employed for decades 20 was fired unceremoniously. ¶¶140-162. At the end of the Class Period, Apple admitted that a full one- 21 third ($60 million) of Apple's $180 million shortfall stemmed directly from the K-12 education "train 22 wreck." ¶218. 23 27. As the Court found, however, "the issue is one of Defendants' knowledge." Order at 27. 24 Specifically, the Court noted that "Plaintiffs do not allege that [Apple Corporate Controller] Oppenheimer 25 knew this [July 18, 2000] statement to be false when he made it." Order at 28. It is certainly plaintiffs' 26 position that top officers should not speak specifically about operation areas if they are unaware of the 27

28 5 In its Order, the Court did not directly address this alleged false statement. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 9 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 14 of 116

1 current state of such operations. Here, the Amended Complaint sets forth in detail the timing of the 2 problems plaguing such core operations. ¶¶140-162. Speaking without checking on such core operations 3 of a business is deliberately reckless. In any event, the Amended Complaint provides detail showing actual 4 knowledge. 5 28. The Amended Complaint shows how both Chief Financial Officer ("CFO") Fred D. 6 Anderson ("Anderson"), who attended the July 18, 2000 conference call, and Controller Oppenheimer, 7 who made the July 18, 2000 statement, were aware of the "train wreck" from the first day of the change- 8 over on July 1, 2000, and knew it did not "progress nicely." ¶¶154-162. In addition to Jobs' admission, 9 Apple's internal system for tracking and comparing actual education sales with forecasts in real time kept 10 these officers, as well as Jobs, up to date on the impending "train wreck." ¶¶156-162. 11 29. First, a former Apple Business Analyst (CW25) confirmed that Apple utilized "SAP," a 12 software system providing up-to-the-minute educational sales data. ¶157. Apple's former Senior Director 13 of Higher Education (CW36), who reported directly to Jobs, confirmed that Jobs personally received 14 forecasted education sales numbers from Mitchell Mandich ("Mandich"), Apple's Senior Vice President 15 of Worldwide Sales. CW36 also believed that Jobs received actual educational sales numbers from CFO 16 Anderson. In addition to SAP, CW36 stated that Apple generated weekly "Sales Reports" on a 17 spreadsheet attached to an email that contained actual educational revenue numbers which could then be 18 compared to forecasts. ¶156. CW36 also stated that Mandich, the Senior Vice President who supplied 19 Jobs with forecasts, was specifically named on the Sales Reports distribution list. ¶156. Based on CW36's 20 observations of these reports, CW36 confirmed that K-12 sales during the Class Period were "going in the 21 toilet" and were eclipsed by higher education sales during each and every month of 4Q00. ¶156. 22 30. These new details combined with Jobs' admissions that Apple saw the negative impact of 23 the sales transition at the time the new sales people arrived, i.e., on July 1, 2000, are sufficient to provide 24 the Court with a strong inference that Apple consciously disregarded the truth when making its positive 25 statements in 4Q00 about the progress of the transition and Apple's ability to hit its numbers. 26 D. Apple's Financial Health and 4Q00 Prospects 27 31. The Court's Order did not specifically address the falsity of Apple's continuing confirmation 28 of its financial prospects for 4Q00. These numbers were given at the start of the Class Period after the

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1 market closed on July 18, 2000 (first impacting July 19, 2000, purchasers thereby starting the Class 2 Period). Specifically, in a conference call on July 18, 2000, Apple CFO Anderson stated "Yeah, I would 3 say we're targeting over 10% sequential growth." When pressed, Anderson said "I'm saying over 10%, 4 so I think it will be double digits." ¶63. Based on the 3Q00 numbers just released, 10% growth equated 5 to revenue exceeding $2 billion for 4Q00. In addition, Apple CFO Anderson stated during this conference 6 call that margins would decline 2%-3% to 26.8%-27.8%, and operating expenses would increase by $15 7 million with a flat tax rate. Thus, when combined with Anderson's margin guidance, Apple's 10% growth 8 projections equated to $0.40+ EPS. ¶63. Apple then reiterated its guidance during another conference 9 call the next day with Jobs in attendance. ¶¶74-81. 10 32. Apple confirmed these numbers throughout the Class Period stating that Apple was 11 "comfortable" with its 4Q00 EPS and revenue expectations (August 23, 2000 and September 6, 2000) 12 (¶¶177, 197); that back-to-school and education sales had "accelerated as seasonally expected"(August 13 23, 2000 and September 6, 2000) (¶¶177, 197); that shipment and availability of its new products was 14 on plan (August 23, 2000 and August 30, 2000) (¶¶177, 179); that Apple was "on track" (August 23, 15 2000) (¶177) and would "hit" its 4Q00 financial forecasts (September 13, 2000). ¶201. As set forth 16 above, the Amended Complaint now adds sufficient detail giving rise to a strong inference of Apple's 17 knowledge on July 18, 2000, of material problems in every important business area upon which Apple's 18 financial health was based. As such, the inference of knowledge is even stronger at the time Apple's 19 subsequent statements concerning its financial prospects were made in August and September 2000. 20 E. Inventory Levels and Gross Margins 21 33. The Court's Order also did not specifically address the falsity of Apple's representations 22 throughout the Class Period that its inventory was being effectively managed, pricing action had already 23 been taken to clear old inventory and that "no further action" would be necessary in 4Q00 (August 24 23, 2000 and August 30, 2000). ¶¶177, 179. The Amended Complaint now details that Apple knew and 25 failed to disclose inventory and component problems which negatively affected Apple's inventory position 26 and contributed to an approximate 2.0% gross margin miss in 4Q00. ¶¶188-193, 218. First, by August 27 23, 2000, Apple knew that customers were buying older, lower priced, lower margin, single processor 28 Power Macs instead of the new, more expensive, higher margin Power Macs because the dual processor

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1 could not be fully utilized. ¶¶124-127. Apple tried to minimize the performance defect (Ex. I) but never 2 disclosed the impact the defect had on gross margins and inventory. Further, iMac sales failed to catch on 3 due to what CEO Jobs called "missing the boat" on CD read/write drives and failing to equip the iMacs 4 with 17-inch monitors, further compounding Apple's inventory position. ¶¶137-139, 218. According to 5 Apple's Materials Manager for the G4 product line (CW37), inventory ballooned to 1.5 its normal levels 6 between 3Q00 and 4Q00. ¶191. 7 34. Apple knew about the inventory problems by at least August 2000, based on its ability to 8 track up-to-the-minute sales using SAP combined with Apple's knowledge that Power Macs and iMacs 9 were not selling well and K-12 schools were buying less. ¶¶123-139, 145-162. Further, Apple admitted 10 its inventory problems by announcing a three to five week inventory overhang at the end of 4Q00 and an 11 approximate 2.0% gross margin miss, and attributing $30 million of its revenue shortfall to a mix-shift 12 toward lower priced single processor Power Macs, due in large part to the failure of the Power Mac. 13 ¶218. Thus, Apple's unfavorable inventory position caused the Company to take reserve accruals against 14 cost of sales in 4Q00 for pricing action to promote inventory sell through in 1Q01, and caused Apple to 15 incur supply cancellation penalties which affected gross margins by approximately 2.0%. ¶¶190-193, 218. 16 None of these problems were disclosed or even hinted at while Apple told the market it was "comfortable" 17 and "on track" to "hit" its 4Q00 projections, that its inventory was being effectively managed, and that 18 Apple would not need further inventory pricing action in 4Q00. 19 F. Other Issues 20 35. With respect to plaintiffs' "Insider Stock Sales" allegations involving four of Apple's Senior 21 Vice Presidents, plaintiffs believe those allegations are relevant to reinforce the already strong inference that 22 Apple's top executives knew its 4Q00 results would be below expectations due to the host of problems 23 in Apple's most important business areas. ¶¶226-257. Further, plaintiffs believe Apple's repurchase of 24 approximately $25 million of its own stock during the Class Period was used as an anti-dilution measure 25 to decrease the float of Apple stock, thereby increasing the value of Apple executive stock options and the 26 Company's EPS and stock price in the short term. ¶257. See Declaration of Bjorn I. Steinholt ("Steinholt 27 Decl."), Ex. C attached hereto. Indeed, as the New Yorker recently reported on September 23, 2002: 28

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1 According to George Fenn and Nellie Liang, two economists at the Federal Reserve Board, most stock buy-backs are intended to increase the value of executive stock 2 options by reducing the number of shares that a company has outstanding, making it possible to report increased earnings per share even if total earnings don't rise at all. This 3 sort of financial engineering can boost a firm's stock price in the short run, but it can also do long-term damage. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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1 II. INTRODUCTION 2 36. This is a class action on behalf of all purchasers of the common stock of Apple between 3 July 19, 2000 and September 28, 2000, inclusive, seeking to pursue remedies under §§10(b) and 20(a) 4 of the Exchange Act and Securities and Exchange ("SEC") Rule 10b-5. 5 37. On July 18-19, 2000, defendant Jobs, CEO of defendant Apple, kicked off a public 6 relations blitz to promote the Company and its newest line of personal computers: the Power Mac, 7 containing a "dual-processor" technology, a new line of "iMacs" and the G4 Cube, a fully-powered 8 computer encased in what Jobs described as a "stunning crystal clear enclosure." 9 38. Jobs and Apple representatives used the product introductions, which followed the 10 announcement of flat 3Q00 results, to prop up and encourage investor confidence in Apple at a time when 11 Apple desperately needed good news. During Jobs' on-stage presentation and in stock analyst conference 12 calls held thereafter, defendants used the new products as part of a "turnaround story" to position Apple 13 as a "genuine growth company." 14 39. Defendants claimed that sales of the new computers would result in Apple achieving strong 15 revenue and EPS growth in its 4Q00 (to end September 30, 2000) and for its FY01. Consequently, the 16 Company advised analysts to increase the forecasts for Apple's revenue (and EPS) for these periods to 17 $2.0+ billion ($0.40+ EPS) and $9.7+ billion ($2.10-$2.15 EPS). 18 40. Apple based its 4Q00 financial forecasts and subsequent false statements on three main 19 drivers: (a) Apple's new products, including the G4 Cube, Power Mac and iMac; (b) Apple's education 20 sales (which historically accounted for up to one-third of Apple's revenues); and (c) Apple's lean inventory 21 position. Throughout the Class Period, Apple made positive statements about all three components to 22 support its 4Q00 projections. What Apple did not disclose, however, was that all three components 23 suffered from catastrophic problems which rendered its statements plainly false and its financial forecasts 24 without reasonable basis. For example, when Jobs told the assembled media representatives and 25 Macintosh faithful that the G4 Cube he presented on stage at Macworld was a "brain in a beaker" hanging 26 in a "stunning crystal clear enclosure," he misrepresented the fact that the G4 Cube he used did not have 27 the noticeable "mold lines" and cracking that plagued the G4 Cubes coming off the Company's 28 manufacturing lines. Nor did Jobs disclose that the G4 Cube was still being reconfigured and reconstructed

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1 to fix major design defects, including a defective heat-sensitive power switch and overheating of the central 2 processing unit ("CPU") due to the Cube's compact design. All of these problems prevented Apple from 3 mass-producing enough G4 Cubes to meet 4Q00 financial projections. 4 41. When Jobs bragged about the parallel processing speeds achieved by the new Power Mac, 5 he failed to disclose that Apple's then-current operating system, OS 9, could not take advantage of the dual 6 processor architecture. Rather, the product's potential was largely wasted until the next-generation 7 operating system, OS X, was released to catch up with the hardware advance. Finally, while Jobs asserted 8 that Apple expected to start selling the G4 Cube in volume in August 2000, he failed to mention the known 9 design and production problems that made the August 2000 ramp-up date impossible. Apple never did 10 solve the Cube's production and design problems during the Class Period and less than a year later, on July 11 3, 2001, Apple completely abandoned its attempt to manufacture the G4 Cube. ¶225. 12 42. In addition to not disclosing Apple's product problems, Apple also failed to disclose a 13 wholesale change in the Company's key K-12 educational sales process that already had disastrous 14 consequences on Apple's 4Q00 sales prior to Macworld. Three months earlier, on April 15, 2000, Apple 15 notified its long-standing group of independent K-12 sales agents they would be terminated as of June 30, 16 2000, in favor of an in-house "direct sales" model. Consequently, the terminated agents cannibalized 4Q00 17 sales to bolster their last round of commissions – an impact Apple recognized immediately in July 2000. 18 As Jobs ultimately admitted, the terminated agents "did absolutely nothing to build for sales in the 19 July quarter. So when our new sales folks got there, they found there was no pipeline work at 20 all; they had to start from scratch." Yet Apple falsely asserted throughout the Class Period that the 21 sales force transition "progressed nicely" (July 18, 2000) and that education sales had "accelerated as 22 seasonally expected" (August 23, 2000). 23 43. As Apple's 4Q00 unfolded, Apple buried the market in positive statements about its new 24 products and financial health, including inter alia: that demand for the G4 Cube was "greater than we 25 thought it would be " (September 13, 2000); that Apple was "comfortable" with its 4Q00 EPS and 26 revenue expectations (August 23, 2000 and September 6, 2000); that Apple was "extremely happy" with 27 the G4 Cube giving Apple the "strongest product line that Apple has ever had" (September 13, 2000); 28 that inventory was being effectively managed and no further pricing action would be necessary to clear

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1 inventory (August 23, 2000 and August 30, 2000); that shipment and availability of its new products was 2 on plan (August 23, 2000 and August 30, 2000); and that Apple was "on track" (August 23, 2000) and 3 would "hit" its financial forecasts for 4Q00 (September 13, 2000). As a result, Apple's stock climbed to 4 a Class Period high of $64-1/8 in early September 2000. Right at the peak of this public relations drive, 5 four top Apple officers unloaded 370,000 shares of their Apple stock for $22 million. 6 44. As late as two weeks before the end of the 4Q00, Apple continued to mislead the market. 7 On September 13, 2000, Jobs appeared on CNBC and was questioned about a shortage of the 8 Company's G4 Cube. Instead of telling the truth about the known design defects and supply problems that 9 plagued Apple's star product, Jobs asserted that he was "extremely happy" with sales of the Cube and that 10 Apple had shipped "many tens of thousands." Jobs ended by stating: "I think we're going to hit our 11 forecasts this quarter so if they're hard to find, I think that's because demand is greater than we 12 thought it would be ...." Contrary to Jobs' statements, however, the Cubes were hard to find because 13 Apple could not mass produce them as designed. The Cubes Apple did produce and ship were riddled 14 with cosmetic and functional defects, causing customer complaints, major repairs and customer returns. 15 The G4 Cube contributed a $90 million shortfall to Apple's dismal 4Q00 revenues (net sales) of $1.87 16 billion and EPS of only $0.30 – far below the levels previously forecast. 17 45. On September 28, 2000, less than 12 trading days after Jobs' positive statements, Apple 18 shocked investors by revealing a huge revenue and EPS shortfall for 4Q00 that was directly attributed 19 to negative results in the specific areas Apple continually touted throughout the Class Period: (a) sales and 20 demand for new products; (b) education revenues; and (c) inventory position. Specifically, Apple's 4Q00 21 results revealed a $180 million revenue shortfall due to: (i) a $90 million shortfall in G4 Cube sales; (ii) a 22 $60 million shortfall in sales to K-12 education customers; and (iii) a $30 million shortfall due to poor 23 Power Mac sales. Additionally, Apple's margins took a hit of approximately 2% due to component 24 contract penalties and inventory impairment. In other words, Apple's true financial results for 4Q00 25 reflected the direct opposite of what defendants repeatedly told the market throughout the Class Period 26 and as late as two weeks earlier. 27 46. Needless to say, investors, analysts and the media were incensed at the stark inconsistency 28 and proximity of Apple's positive statements and its actual results. Indeed, according to one analyst, "They

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1 should have made this announcement already. Management was saying two weeks ago that 2 everything is fine. When they knew there were problems, they should have come out and said it 3 then." The Los Angeles Times reported on September 29, 2000: "[a]s recently as last week, many 4 analysts had reiterated their confidence in the Company and said they saw strong demand for a slew of new 5 products." Apple's stock collapsed from $61-3/64 on September 20, 2000 to $25-3/8 on September 29, 6 2000, continuing to fall to as low as $17 and then to $13-5/8, as investors absorbed the full impact of these 7 shocking revelations – a stock decline that wiped out over $10 billion of Apple's market 8 capitalization in just a few days. 9 47. Thus, this action involves the dissemination of false and misleading statements by defendants 10 concerning the quality and appearance of the G4 Cube, as well as its supply, demand and sales, the 11 demand and performance of the Power Mac's dual-processor, the demand for Apple's new line of iMacs, 12 the state of Apple's component part and finished goods inventories, changes and sales in Apple's product 13 distribution network for its vitally important K-12 education market and the negative impact the undisclosed 14 adverse conditions had on Apple's business operations and financial results. 15 48. The magnitude of Apple's internal undisclosed problems in 4Q00 is further shown by the 16 spillover effect they had on Apple's dismal financial performance in FY01, particularly in 1Q01 (ended 17 December 31, 2000). The Company suffered a huge loss in 1Q01 due to underperforming products, the 18 failure of the direct sales schools model and ballooning inventories in 4Q00, which Apple never overcame. 19 The 1Q01 debacle led to a net loss of $247 million or $0.73 per share and a $37 million loss for the entire 20 FY01: 21 FY01 22 12/30/00 03/31/01 06/30/01 09/29/01 Year Net Sales $1,007 $1,431 $1,475 $1,450 $5,363 23 Operating Income (Loss) ($420) ($8) $31 $53 ($344) 24 Investment Gains $71 $5 $11 $1 $88 25 Net Income (Loss) ($247)* $43 $61 $66 ($37)* 26 Earnings (Loss) Per Share ($0.73)* $0.12 $0.17 $0.19 ($0.11)*

27 * Excluding investment gains and effects of new accounting pronouncement. 28

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1 The impact of Apple's false statements on its stock price is set forth in the following chart: 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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Apple Computer Inc. June 1, 2000 - August 22, 2001 Daily Share Prices 8/30/00 Seybold Conference/Conversations with Analysts No change in shipment rates or component 9/13/00 Jobs CNBC Interview availability; on track to meet shipping G4 Cubes "hard to find because $70 schedules; inventories being effectively demand is greater than we thought managed; Apple on plan. it would be;" "we're going to hit our forecasts this year." 8/23/00 Meeting with Prudential Analysts Back-to-school and education sales had 9/28/00 Apple "Bombshell" accelerated as expected; orders for G4 Cube Apple reveals 4th Q F00 and F00 strong; all necessary pricing action for older inventories taken in 3rd Q F00 -- no impact in results to be "substantially below forthcoming quarters; inventories under expectations;" F01 forecast cut back. control; comfortable with 4th Q F00 forecasts. $60

Reasons Educational market sales very poor due to 7/00 elimination of independent distributors G4 Cube had lines/cracks and Subsequent Events defective On/Off switches; too $50 expensive; consumers reject product Apple abandons Cube product Power Mac G4 Dual Processor had Jobs admits decision to eliminate third poor sales; clock time too slow; lacked necessary software party distributors for education models was 8/25-31/00 9/6/00 New iMacs had poor sales due to "stupid" and caused a "train wreck" and 7/18/00-7/19/00: 3rd Q lack of rewriteable CD drive and 17" Four Senior Vice Conversations F00 results monitors was "totally my fault." 7/25/00 USA Presidents sell with Analysts "The turnaround is Apple's inventories out of control -- Today 370,000 shares Apple Apple admits it paid huge penalty fees for over. We're now in the ballooned by 60% -- 4th Q F00 and Sales of new comfortable with early stages of a strong for $22 million 4th Q F00 1stQF01 pricing action necessary to cancellation of electronic/computer $40 growth story." Apple's products should revenue clear out inventories; component part components it preordered during F00. new products: cancellation penalties hurt 4th QF00 maintain sales estimates; "Revolutionary" and 1st Q F01 results through back-to-school Apple's 1st Q F01 revenues fall to $1 "crystal clear" G4 back-to-school demand SLASHES F01 FORECAST; Cube, "the coolest billion. 2nd and 3rd Q F01 revenues fall by and Christmas accelerating as REVENUES DECLINE TO $7 computer ever." seasons. expected. BILLION, HUGE 1ST Q F01 LOSS 50% from F00 levels. New Power Mac G4 OF $250 MILLION -- LIKELY Dual Processor PC -- LOSSES FOR ALL OF F01 Apple suffers huge loss for 1st Q F01 Dollars Per Share faster than Intel Pentium. $30 New products to ship 7/31/00 Newsweek/ Apple loses $9 billion shortly. Business Week in market capitalization All pricing actions G4 Cube has a necessary to account "perfectly clear, for older product pristine crystal taken -- no impact in enclosure," "the whole forthcoming quarters. thing is perfect," "there INCREASES 4th Q will be a million copies F00 EPS FORECAST of this," Apple can TO $.44-.46 AND F01 deliver years of $20 REVENUE AND EPS sizzling growth and GROWTH RATES hefty profits. TO 20% AND 15% -- $9.7-9.8 BILLION IN REVENUES -- EPS $2.10-2.15. Class Period K-12 school transmission 7/19/00 - 9/28/00 "progressed nicely." $10 06/01/2000 09/19/2000 01/08/2001 04/27/2001 08/15/2001 07/26/2000 11/10/2000 03/05/2001 06/21/2001 Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 24 of 116

1 III. JURISDICTION AND VENUE 2 49. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the Exchange 3 Act [15 U.S.C. §§78j(b) and 78t(a)] and SEC Rule 10b-5 [17 C.F.R. §240.10b-5]. 4 50. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 5 §§1331 and 1337 and §27 of the Exchange Act [15 U.S.C. §78aa]. Apple used the means and 6 instrumentalities of interstate commerce and the facilities of the national securities markets. 7 51. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. 8 §1391(b). Many of the acts alleged herein occurred in this District. 9 IV. PARTIES 10 52. Lead plaintiffs Hawaii Structural Iron Workers Pension Trust Fund, D. Oscar Fuster and 11 Gary and Peggy Thompson purchased the common stock of Apple at artificially inflated prices during the 12 Class Period, as detailed in the certifications previously submitted to the Court, and were damaged thereby. 13 53. Defendant Apple's executive offices are located in Cupertino, California. Apple designs, 14 manufactures and markets personal computers, primarily to education, creative, consumer and business 15 customers. Substantially all of Apple's sales are derived from the sale of personal computers from its Apple 16 Macintosh line of computers. Apple manages its business primarily on a geographic basis, including 17 segments in the Americas, Europe (including the Middle East and Africa), Japan and Asia Pacific (including 18 Australia). Apple's common stock traded in an efficient market. 19 54. Defendant Jobs is the CEO of Apple. Jobs controls Apple and is therefore liable as a 20 controlling person under §20(a) of the Exchange Act. 21 55. Jobs, Apple and its representatives made false and misleading statements, engaged in a 22 scheme to defraud and pursued a course of business that operated as a fraud and deceit on purchasers of 23 Apple common stock. 24 56. The top executives of Apple run the Company on a day-to-day basis, dealing with 25 important issues facing Apple's business, i.e., demand for its products, product sales, orders, supply and 26 inventory, as well as the design, testing and final pre-shipment validation of its new products, the 27 manufacturing effectiveness and efficiencies of its products, and the quality of those products. Apple 28 maintained a system of internal controls that was organized and directed on a day-to-day basis under the

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1 supervision of defendant Jobs, Apple's CFO, Controller, Treasurer and six senior vice presidents 2 (collectively, the "Senior Officers"): 3 (a) Jobs was at all relevant times CEO and a director. According to Article V of 4 Apple's corporate bylaws as of April 20, 2000, Jobs' duties as CEO were, inter alia: "to act as the general 5 manager and chief executive officer of this corporation and, subject to the control of the Board of Directors, 6 to have general supervision, direction and control of the business and affairs of this corporation 7 [and] ... to have general charge of the property of this corporation and to supervise and control 8 all officers, agents and employees of this corporation." 9 (b) Anderson was at all relevant times Executive Vice President and CFO. According 10 to Article VIII of Apple's corporate bylaws as of April 20, 2000, Anderson's duties as CFO were, inter 11 alia: "[t]o supervise and control the keeping and maintaining of adequate and correct accounts of 12 this corporation's properties and business transactions, including accounts of its assets, 13 liabilities, receipts, disbursements, gains, losses, capital, surplus and shares ... [and] [t]o render 14 to the Chief Executive Officer, the President or to the Board of Directors, whenever either may require, 15 accounts of all transactions as Chief Financial Officer and of the financial condition of this 16 corporation.... Generally to do and perform all such duties as pertain to such office and as may be 17 required by the Board of Directors." 18 (c) Oppenheimer was at all relevant times Corporate Controller. 19 (d) Gary Whistler ("Whistler") was at all relevant times Treasurer. 20 (e) Rubinstein was at all relevant times Senior Vice President-Hardware Engineering. 21 (f) Avadis Tevanian, Jr. ("Tevanian") was at all relevant times Senior Vice President- 22 Software Engineering. 23 (g) Sina Tamaddon ("Tamaddon") was at all relevant times Senior Vice President- 24 Service and Support. 25 (h) Nancy R. Heinen ("Heinen") was at all relevant times Senior Vice President and 26 General Counsel. 27 (i) Cook was at all relevant times Senior Vice President-Worldwide Operations. 28 (j) Mandich was at all relevant times Senior Vice President-Worldwide Sales.

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1 57. Each of the Senior Officers, by virtue of his/her high-level position at Apple, directly 2 participated in the management of Apple, was directly involved in the day-to-day operations of Apple at 3 the highest levels, was privy to confidential proprietary information concerning Apple's business, operations, 4 products, growth, financial statements and financial condition and was aware of or deliberately disregarded 5 that the false and misleading statements were being made by and regarding the Company. 6 58. Apple's day-to-day operations are dominated by Jobs, its founder and CEO. Jobs and 7 the small tight-knit group of top executives listed above run Apple with an obsessive attention to detail and 8 secrecy, as they control all aspects of Apple's operations. As Business Week reported during the Class 9 Period: 10 Jobs now runs every aspect of the company with a quintet of trusted top executives .... Jobs quickly stripped out vestiges of bureaucracy, eliminating the 11 administrative officer and chief technologist. Now, each exec is responsible for everything related to his specialty rather than a narrow product group or market segment. Hardware 12 Chief, Jon Rubinstein, for example, can make sure every new Mac is built with parts that can be leveraged across as many models as possible. 13 This tight-knit management structure is crucial. Since almost all big 14 decisions are made at Monday morning executive committee meetings, it's easy for various parts of the company to work closely together. And it lets Jobs easily 15 impose his perfectionism on everything the company produces, from press releases to software to new PCs. 16 Business Week also reported on Apple's top executive team's obsession with secrecy: 17 Jobs has even managed to impose his insistence on total secrecy at a 18 company where leaks were once rampant.... Indeed, only a few hundred of Apple's 10,000 staffers had heard of the [G4 Cube] when Jobs took the stage for his July 19 19 keynote [at the Macworld Conference]. "We have cells like a terrorist organization," laughs Rubinstein. "Everything is on a need-to-know basis." 20 V. BACKGROUND TO THE CLASS PERIOD 21 59. Apple was "left for dead" in 1996-1997, when it experienced management upheaval, 22 market rejection of its products, mounting losses and shriveling market share. The Company's stock fell 23 to less than $10 per share. When Apple's co-founder, Jobs, returned as Apple's CEO in 1997, however, 24 Apple appeared to recover. By mid-2000, Apple had reported 11 consecutive quarters of EPS growth, 25 largely due to the success of its new colorful iMac line of personal computers. As a result of Apple's 26 turnaround, its stock recovered, soaring to its all-time high of $75-3/16 in mid-March 2000. 27 28

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1 60. By May and June 2000, however, Apple had not introduced new products or significant 2 product upgrades for over six months. Investors became concerned that Apple's sales momentum was 3 slowing due to its aging product line and customers deferring purchases of older personal computers while 4 awaiting the release of Apple's new products. In fact, in April 2000, PaineWebber cautioned the 5 investment community that growth in sales of Apple's flagship iMac line of personal computers was limited 6 due to the aging of that product line and dominance of WinTel products.6 As a result of these concerns, 7 Apple's stock fell from its all-time high of $75-3/16 on March 23, 2000 to as low as $40-3/16 in early June 8 2000 – eliminating $5.4 billion of Apple's market capitalization. The huge drop in Apple stock cost Apple's 9 top insiders millions of dollars based on their Apple stock ownership and vested options. The drop also 10 caused significant concerns among institutional investors who owned Apple stock and analysts who 11 followed and recommended Apple stock to their clients. Thus, Apple and its Senior Officers were under 12 tremendous pressure to announce and introduce upgraded, refreshed and new products at Apple's 13 upcoming Macworld Conference in mid-July 2000 in New York City. Apple's stock recovered to $57- 14 $60 by mid-July 2000, however, as Apple told analysts to anticipate better than expected 3Q00 EPS and 15 hyped the release of upgraded and/or new products at the upcoming Macworld Conference, both of which 16 would drive strong revenue and EPS growth for 4Q00, FY00 and FY01. 17 61. Thus, by mid-July 2000, investors eagerly anticipated two important Company indicators. 18 First, the release of Apple's 3Q00 results on July 18, 2000. Second, the semi-annual Macworld 19 Conference on July 19, 2000 in New York City, at which Apple would announce and introduce several 20 new products to spruce up and refresh its aging iMac and Power Mac product lines. The product 21 presentations would be followed by a conference for analysts during which top Apple officials would 22 provide detailed information about Apple's business, new products and financial outlook. On July 17, 23 2000, Bloomberg reported: 24 Apple Computer Inc. Chief Executive Steve Jobs may show off faster iMac personal computers, high-end Power Macs and new monitors at the MacWorld Expo 25 conference in New York this week. 26

27 6 "WinTel" refers to computers configured with a Windows operating system and Intel microprocessor. Apple's personal computers are configured with its own proprietary operating system and 28 microprocessors manufactured by companies such as Motorola. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 23 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 28 of 116

1 Jobs will give the keynote speech at the gathering of Macintosh developers and users .... 2 Apple co-founder Jobs traditionally uses the semiannual MacWorld shows to 3 make a splash by unveiling products .... Analysts are expecting Jobs to introduce new machines .... 4 "He likes to surprise people," said Jeff Westerfield, director of merchandising at 5 ComputerWare, a Mac retailer. 6 * * * 7 "They maximize the anticipation and it builds a huge amount of excitement," said analyst David Bailey of Gerard Klauer Mattison .... 8 On July 17, 2000, PaineWebber issued a report on Apple stating: 9 * Apple is scheduled to report fiscal third quarter (June) earnings on Tuesday, July 10 18 after the market closes, with the MacWorld conference to take place starting the following day.... 11 * During May, Apple appears to have made very good progress in bringing 12 down its retail inventory and presently stands out as the only vendor among the major retail vendors that has brought its inventory level under control.... 13 * Sales of Apple's iMac were less robust than originally planned for the current 14 quarter. Since the iMac was last upgraded in October, it appeared sales had slowed as consumers/channel anticipate an upgrade at the upcoming MacWorld 15 conference in July. 16 VI. DEFENDANTS' WRONGFUL COURSE OF CONDUCT AND FALSE AND MISLEADING STATEMENTS 17 A. False Statements Made During Macworld New York: July 18-19, 2000 18 1. False Statements Made During Jobs' Speech and Investor 19 Conference Calls 20 62. On July 18, 2000, after the close of the market, Apple reported its results for 3Q00, ended 21 July 1, 2000.7 Excluding gains from investments, Apple earned $163 million, or $0.45 per share, with 22 revenues of $1.83 billion. While 3Q00 results were in line with or actually beat EPS expectations 23 announced by analysts following the Company, Apple's results – as expected – showed declining revenue 24 growth due to slowing iMac sales. Yet, rather than admit that demand for Apple products was waning, 25 the Company took steps to condition investors to believe the Company was on the verge of strong growth. 26 27 7 The Class Period starts on July 19, 2000 because it is the investors on July 19 that were first 28 impacted by the close of market statements on July 18, 2000. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 24 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 29 of 116

1 63. On July 18, 2000, Apple CFO Anderson, Corporate Controller Oppenheimer and 2 Treasurer Whistler held a conference call and gave a glowing report about the Company's prospects. 3 During the conference call, Kurt King, an analyst with Bank of America, specifically asked about growth 4 expectations for 4Q00. CFO Anderson responded "Yeah, I would say we're targeting over 10% 5 sequential growth." When pressed, Anderson said "I'm saying over 10%, so I think it will be double digits." 6 Based on the 3Q00 numbers just released, 10% growth equated to revenue exceeding $2 billion for 4Q00. 7 In addition, Apple CFO Anderson stated during this conference call that margins would decline 2%-3% 8 to 26.8%-27.8%, and operating expenses would increase by $15 million with a flat tax rate. Thus, when 9 combined with Anderson's margin guidance, Apple's 10% growth projections equated to $0.40+ EPS. 10 64. There was simply no basis for the 4Q00 forecasts when made. As detailed herein, sales 11 of older iMacs had already fallen below expectations in 3Q00 (450,000 units sold versus 500,000 12 expected) and the new products were riddled with defects. The G4 Cube suffered from component supply 13 problems and could not be mass manufactured without cracks in its purportedly crystal clear enclosure and 14 defects with its on/off switch. The new Power Mac could not, with the current operating system, take 15 advantage of the dual processor configuration. IMac inventories were ballooning because customers would 16 not purchase iMacs which lacked CD rewritable drives and 17- inch monitors. 17 65. Apple also made false and misleading statements during the conference call about the 18 transition of its education sales force. When asked about education sales, Controller Oppenheimer stated 19 "about a year ago we transitioned our agent sales force in high-ed ... and we started that last quarter in K- 20 12 and that's progressed nicely for us." Oppenheimer's statement was false when made. As detailed 21 herein, the sales transition was a complete failure from the beginning. According to Jobs himself: 22 The problem was, we were very straightforward and told these third-party salespeople ahead of time that, "Hey, in four months we're going to switch and you're going to be out 23 of a job." Obviously these folks did everything they could to sell as much as they could by June 30, when we let them go, and did absolutely nothing to build for sales in the 24 July quarter. So when our new sales folks got there, they found there was no pipeline work at all; they had to start from scratch. And, duh, this was during the peak 25 buying time for schools. It was just stupid on our part to do this then, and that was my decision. It was a train wreck, and it was totally my fault. 26 66. Despite the undisclosed problems, in an effort to maintain Apple's share price and get the 27 products out the door, Apple never wavered from its $2.0+ billion revenue guidance, its Cube sales 28

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1 expectations, or the gross margin guidance equating to an EPS of $0.40+ per share throughout 4Q00. 2 CFO Anderson spoke to the Associated Press on July 18, 2000, which published his statement regarding 3 sequential growth: 4 "The turnaround is over," said Fred Anderson, Apple's chief financial officer. "We're now in the early stages of a strong growth story." "We're targeting 5 over 10 percent sequential (revenue) growth .... It's been about nine months since we have had any major product introduction. We're going to change that 6 tomorrow, and we think you will be impressed." 7 67. On July 19, 2000, the San Francisco Chronicle reported: 8 [B]oth company officials and analysts said products to be unveiled today should push sales growth back onto the fast track. 9 * * * 10 Anderson blamed the iMac slowdown on the fact that Apple hasn't introduced 11 new models in nine months, but he said that would change today, when company chief executive Steve Jobs delivers the keynote address at the East Coast edition of Macworld 12 Expo, the semiannual Mac trade show, in New York. "I think you'll be impressed," he told analysts, adding that the company has "a very strong pipeline of products 13 ...." 14 68. Notwithstanding these positive statements, analysts were disturbed by the iMac shortfall 15 in 3Q00, and Apple's stock fell sharply from $58-7/8 on July 18, 2000 to $51-3/4 early on July 19, 2000. 16 This sharp decline put even more pressure on Apple's executives to present a bullish picture at the 17 Macworld Conference and analyst meetings thereafter, to reassure the investing community that Apple's 18 new products would be quickly introduced, driving strong 4Q00 financial results continuing into FY01. 19 Apple, Jobs and the other Senior Officers knew that without such hype Apple's stock would continue to 20 fall. So Apple and Jobs lied and introduced the new products before they were ready. 21 69. On July 19, 2000, Apple held its Macworld Conference in New York City. The 22 Macworld Conference is a media extravaganza – attended by thousands of people, broadcast live over 23 the Internet and closely covered by the press. For the July 19, 2000 Macworld Conference, hundreds of 24 people lined up all night outside the Jacob Javitz Convention Center waiting to get in. Jobs gave the 25 "keynote" speech at Macworld, introducing and demonstrating its new products including: 26 • Four new iMacs in five additional colors. Four new iMacs were introduced, including a new entry level machine with a suggested retail price of $799. 27 • The Power Mac. In its high-end line of computers, Apple introduced several new 28 machines which adopted a dual processor architecture.

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1 • The G4 Cube. The Cube was hailed as Apple's "pièce de résistance" and was, purportedly, a revolutionary computer which incorporated dual processor G4 chips in an 2 eight-inch clear sided cube containing a DVD drive. The Cube, sheathed in a crystal clear plastic casing, boasted the same power as the Power Macs in a configuration one-fourth 3 the size. Two versions of the G4 Cube were to be made available in early August 2000 at a cost of $1,799 and $2,299, without a monitor. 4 70. During his address at Macworld, Jobs introduced the new Apple products and explained 5 that these products were expected to drive Apple's revenues and earnings in the near-term and throughout 6 FY01-FY02. Jobs stated: 7 • "Power Mac G4 is an awesome product.... [A] 500 megahertz G4 is as fast as a 1.2 8 gigahertz Pentium .... It's pretty amazing .... [W]e've got ourselves a really fast chip here .... We have a Dual Processor G4 here ... because two brains are better 9 than one .... [T]his is going to be the best Power Mac ever ...." 10 • "But today, for the first time in 2-1/2 years we are expanding our product strategy.... What is it? We are combining the power of the Power Mac G4, the awesome power of this 11 machine, with the desktop elegance, the styling and the miniaturization that we learned from doing the iMac. To make a whole new class of machine." 12 • "What's so new and special about this?... Because if this is the size of a Power Mac G4, 13 we have miniaturized all that power into ... an 8-inch cube. An 8-inch cube. Unbelievable!... Our engineers have done some brilliant work ...." 14 • "The G4 Cube is ... the most beautiful product [Apple] ever designed. The 15 computer is in an 8-inch cube and it's suspended in a stunning crystal clear enclosure.... Now, our engineers spent an enormous amount of energy figuring out how 16 to get this amazingly powerful G4 technology into this 8-inch cube .... [T]he G4 Cube, it's amazing.... [T]he system is really beautiful." 17 • "You can just go to the Apple Online Store and order this. All models are available in 18 early August, just a few weeks to go. Power Mac G4 Cube. We are so proud of this thing." 19 2. July 20: Media Reaction 20 71. Apple's false representations on July 18-19, 2000 had their desired misleading effect on 21 members of the financial press, analysts and Apple investors, and were widely reported by the media on 22 July 20, 2000: 23 Dow Jones News Service: 24 If you had happened to be driving past New York's Jacob Javitz Convention 25 Center at around 3:30 a.m. Wednesday morning, you might have wondered why all those people were lined up outside.... Steve Jobs is in town. 26 The Chief Executive of Apple Computer flew to New York City this week .... 27 [H]is fans came with him. People started lining up in the middle of the night to ensure prime spots for his 9 a.m. address.... This isn't celebrating a charismatic CEO. It's guru 28 worship.

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1 Jobs himself knows this. He's a master at turning the cult of personality into a marketing opportunity. MacWorld is the Apple love fest where the company 2 typically launches new products and generates plenty of buzz. Jobs didn't disappoint. 3 This year ... the big news came in the form of an eight-inch clear-sided cube called 4 the G4 Cube – launched with typical Apple fanfare.... 5 When it was wheeled out, a frenzy of camera flashes lit up the dimmed room. 6 USA Today: 7 Apple Computer CEO Steve Jobs took his dazzling show to the Big Apple on Wednesday .... 8 * * * 9 With enough fanfare and flair to satisfy the most exacting Broadway 10 producer, Jobs literally unveiled the Power Mac G4 Cube, a 17-pound box that combines the horsepower of Apple's top-of-the-line G4 with the aesthetics of the 11 iMac. 12 * * * 13 The Cube was the centerpiece of a busy day for the PC pioneer, which refreshed and expanded its desktop product line at MacWorld Expo, a hybrid of a trade 14 show and an evangelical revival meeting for Apple's most loyal customers and enthusiasts. 15 The Wall Street Journal: 16 When co-founder Steve Jobs returned to rescue Apple Computer Inc. in 1997, he pared the company's product lines to the core. Now, the company has shifted 17 strategy and started to expand again. 18 Yesterday, Mr. Jobs ... unveiled the ... computer maker's first new hardware line in more than two years. The new product – the Power Mac G4 Cube, known simply as 19 the G4 Cube – is a sleek eight-inch processor .... 20 * * * 21 The introduction of the new G4 Cube and upgrades in the rest of the computer lineup signal that Apple now believes it's ready to capture more market share. "We got 22 very focused when we were fixing things a few years ago," Mr. Jobs said in an interview following his MacWorld keynote speech. "We've proven we can stay 23 focused and can refresh our product lines. Now we can expand ...." 24 The New York Times: 25 Apple Computer introduced a flurry of new products yesterday .... 26 Apple has enjoyed a remarkable corporate revival the last three years under the leadership of Steven P. Jobs, who returned to take the helm of the company he co- 27 founded in 1975. 28 * * *

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1 "The question some people have had about Apple is, 'Can we keep it up?'" Mr. Jobs, the chief executive, observed in an interview. "Well, we've answered 2 that question here today. Innovation keeps coming from Apple." 3 * * * 4 "We want Apple to stand at the intersection of art and technology." 5 Perhaps the most visually striking innovation announced yesterday was a new line of Power Macintosh called the G4 Cube. 6 San Jose Mercury News: 7 Apple Computer Inc. introduced its latest design innovation: a cube-shaped 8 version of its Power Mac G4.... [W]hat [Jobs] called "the coolest computer ever...." 9 * * * 10 "I think the products exceeded our expectations, especially the G4 Cube," said Rob Follis, a London-based consultant. "Steve Jobs is a real showman.... 11 [T]here was a lot more product than I anticipated." 12 * * * 13 The product announcements pleased analysts .... 14 "This gives me a great deal more confidence in my estimates going forward," [an analyst] said. "It gives a very viable plan of how they're going to 15 grow their units by 25 or 30 percent next year." 16 The Boston Globe: 17 You've probably seen it on TV already – that vaguely shocking white cube with a supercomputer inside, the most gorgeous desktop machine that Apple Computer Inc. 18 has ever produced. 19 When Apple CEO Steve Jobs waved his arm, and the computer was rolled out onto the stage at MacWorld Expo yesterday, there was a sound in thousands 20 of throats – a cheer, a gasp, a groan of lust, all mingled. 21 Nobody else makes computers like this, and they waste their time and money when they try.... 22 * * * 23 By the time Jobs was done, you could feel the heat rolling off the show floor in 24 waves.... The people here are stoked with a confidence I haven't seen at a MacWorld in years. The decade of exile is over, and Apple is once again in a 25 position to take on the world. 26 72. These statements, based on defendants' misleading presentations at Macworld, reflected 27 the false image defendants sought to portray. As detailed herein, the Macworld presentation and 28 corresponding analyst conference calls, orchestrated by Jobs and Apple, misrepresented the real products

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1 the Company could sell and misled the media regarding revenues and EPS growth in 4Q00 and the quality 2 and availability of the new computers. 3 3. July 20: Investment Analyst Reaction 4 73. In addition to making false claims about the quality and availability of products at the 5 Macworld Conference, Jobs and other members of Apple's senior management (including Anderson) also 6 hosted an analyst conference on July 19, 2000 with securities analysts and the financial press, reaffirming 7 Apple's 4Q00 financial projections and reinforcing the importance of the new products to the Company's 8 revenue and EPS growth. At the July 19, 2000 analyst meeting, Anderson, Jobs and other Apple 9 executives spoke with members of the financial press and analysts from S.G. Cowen, Prudential Securities, 10 Bear Stearns, DLJ Securities, A.G. Edwards, PaineWebber and Gerard Klauer Mattison, telling them: 11 • The slowdown in iMac sales during 3Q00 was not the result of any saturation of Apple's "installed base" of loyal customers. Customers' anticipation of the revamping 12 of Apple's product family had been the "primary factor" in iMac sales falling short, as potential customers waited for a new version of the iMac and other new Apple 13 products to be released. 14 • Based on the introduction of Apple's new products in 4Q00, Apple expected to report 10% revenue and EPS growth going forward and advised analysts to 15 increase projections for 4Q00. 16 • Increased sales volume resulting from lower-priced machines would allow Apple to increase revenues and gain market share with only a slight decline in gross 17 margins, the effect of which should be mitigated by the higher profits resulting from sales of the more expensive Power Macs and G4 Cubes. 18 • Apple expected to sell 800,000 G4 Cubes in its first year and 150,000 G4 Cubes in 19 4Q00, with quarterly shipments to occur in August 2000. 20 • The G4 Cube, together with the other new products, would bolster top-line growth, leading to 20%+ year-over-year revenue growth in FY01. 21 • Because Apple had executed by delivering 11 consecutive profitable quarters, the G4 22 Cube and upgrades to the rest of the Company's product line-up signaled that Apple could capture more market share with its expanding product line. 23 • The success of the G4 Cube would be driven by its "revolutionary" design, which 24 incorporated aesthetics that were as pleasing to Apple's customers as the G4 Cube's dual processors were functional. 25 • These new products were all to be made available in 4Q00 (some at the quarter's 26 inception and some soon thereafter) and would drive a resurgence of revenues and earnings in 4Q00 and beyond. The G4 Cube would expand Apple's product offering 27 into a new category of computer sales and, therefore, be a very significant part of the driving force behind the Company's continued growth and profitability. 28

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1 • Apple expected 4Q00 revenues and EPS of $2.0+ billion and, based on a 27.2% overall margin, $0.40+, respectively. 2 • Apple expected FY00 EPS of $1.83 and revenue and EPS growth in FY01 of 20% and 3 15%, respectively. 4 • Analysts should raise earnings estimates for FY00 from $1.80 to $1.84-$1.85 and for FY01 from $1.92 to $2.10-$2.15, to reflect the positive sales momentum to be 5 generated by new products, and based on management's better sense of timing and ramp of new products. 6 Analysts following Apple were suitably impressed and dutifully raised their EPS forecasts for Apple based 7 on this unabashedly bullish presentation. 8 74. On July 20, 2000, Prudential Securities issued a report on Apple by Kimberly Alex, which 9 was based on and repeated the positive statements and information provided at the July 19, 2000 10 conference. The report increased the forecasted FY00 and FY01 EPS for Apple to $1.84 and $2.10, 11 respectively, and increased the 4Q00 EPS forecast to $0.45. It also stated: 12 * Yesterday, at Apple's annual MacWorld event in NYC Steve Jobs delivered the 13 key note address in which Apple announced a suite of new product offerings. Following the key note, Apple hosted an analyst meeting with management executives – 14 including Steve Jobs (for the first time). 15 * We view the most significant product announcements from MacWorld as ... the Cube – a revolutionary new product category in an 8 inch cube form factor which 16 blends the advantages of the G4 with the design attributes of the iMac .... 17 * * * 18 The biggest announcement ... was the Cube, an entirely new desktop product offering which combines the power of the G4 with the design features of the iMac. 19 Specifically, the Cube is one-fourth the size of the G4 and is packaged in an 8-inch cube encased in a clear shell.... We believe the product is both exceptionally designed 20 and very unique, providing a good balance of the strengths of the feature sets from both offerings.... The Cube will be available in early August.... 21 We believe the Cube is the most significant new product offering since the iMac 22 .... The form factor will appeal to both those conscious of space constraints as well as those in search of a more ascetically [sic] pleasing alternative to the 23 traditional desktop PC. 24 75. On July 20, 2000, Bear Stearns issued a report on Apple by Andrew Neff, which was 25 based on and repeated the positive statements and information provided at the July 19, 2000 conference. 26 The report increased the forecasted FY00 and FY01 EPS for Apple to $1.84 and $2.15, respectively, 27 and the 4Q00 EPS to $0.45. It also stated: 28

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1 *** The key messages we came away with after the Steve Jobs keynote and the analysts meeting are: Apple is in a growth mode, it has extended (and perhaps 2 solidified) its reputation for innovation, the company combines innovation and discipline to translate into superior financials .... 3 *** [W]e were impressed with the G4 Cube, an 8" cube .... The key takeaway was 4 innovation ... the products were very cool and will clearly generate demand from [Apple's] installed base and possibly beyond.... 5 *** As noted, from a product standpoint, the company is well-positioned for the 6 second half, starting in July (three new iMacs, new Power Macs, new displays), August (G4 Cube) .... 7 *** [W]e raised our estimate ... for FY2000 from $1.80 ... to $1.84 ... and for 8 FY01 from $1.92 to $2.15 .... We now have a better sense of how the company will get there but note that the company has been conservative in its outlook in the past. 9 * * * 10 G4 Power Cube – this 8" cube is a real blow-away innovation from its size 11 to its features.... The product ... is set to launch in early August. 12 * * * 13 CFO Fred Anderson reiterated Apple's guidance for FY01 (25-30% unit growth, 20% revenue growth, gross margin around 27% ...). The main drivers for this growth 14 in Q4 and FY01 include new iMac power point, expanded distribution, dual-CPU Power Macs and the G4 PowerCube. 15 76. On July 20, 2000, DLJ Securities issued a report on Apple by Kevin McCarthy, which 16 was also based on and repeated information provided at the July 19, 2000 conference. The report 17 increased Apple's forecasted FY00 and FY01 EPS to $1.79 and $2.10, respectively. It also stated: 18 Apple introduced several way cool products at MacWorld yesterday. The new 19 G4 Cube small-footprint desktop received standing accolades from the MacWorld audience, as it redefines the look and feel of desktop computing. The 8-inch square 20 graphite-and-smoke cubic PC packs tremendous horsepower in a small package .... 21 We believe these new products ... will provide upside revenue and earnings potential for Apple during the next 2-4 quarters. 22 77. On July 20, 2000, A.G. Edwards issued a report on Apple by Jimmy Johnson, which was 23 also based on and repeated information provided at the July 19, 2000 conference. The report increased 24 the forecasted FY00 and FY01 EPS to $1.84 and $2.09, respectively, and 4Q00 EPS to $0.45. It also 25 stated: 26 MacWorld certainly wasn't short of its usual surprises as Steve Jobs not only 27 introduced new iMacs, but a whole new kind of computer as well. 28 * * *

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1 The biggest surprise of the show was a whole new kind of product .... [G]eared for the pro customers (a new consumer product will follow later) that is an 8-inch cube! 2 Yes, it's shaped completely like a cube and is basically a G4 desktop that has been miniaturized into a completely new form factor. As Steve put [it], it has all the features 3 of a G4 but the elegance of the iMac. The Cube ... will ship in early August .... 4 * * * 5 Q4 guidance is for revenues up over 10% sequentially .... We have left our Q4 estimate unchanged with revenues of just of $2 billion and EPS of $0.45. 6 The company also gave guidance for 2001 which is for revenue growth of 7 20%, unit growth of 25 to 30% and gross margins in the range of 26.5% to 27.5%.... This all boils down to EPS growth of 15% .... 8 78. On July 20, 2000, PaineWebber issued a report on Apple by Don Young, which was also 9 based on and repeated information provided at the July 19, 2000 conference. The report increased the 10 forecasted FY00 and FY01 EPS to $1.85 and $2.10, respectively, and forecasted 4Q00 EPS of $0.46. 11 It also stated: 12 [A]fter spending the day at the MacWorld conference we are taking up our 2001 13 revenue and EPS estimates .... 14 * * * 15 For FY2001 we are modeling for 20% revenue growth, gross margins of 27.4% .... Our 2001 revenue and EPS estimates are $9.77 Bil. and $2.10/share, up from $9.68 Bil. and 16 $2.00/share. 17 79. On July 20, 2000, S.G. Cowen issued a report on Apple by Richard Chu, which was also 18 based on and repeated information provided at the July 19, 2000 conference. The report increased the 19 forecasted FY00 and FY01 EPS to $1.85 and $2.15, respectively, and the forecasted 4Q00 EPS to 20 $0.46. It also stated: 21 Apple's new products shine and are likely to prove to be impossible to resist .... 22 With prospects for 20%+ annual growth ... AAPL stock is compellingly cheap .... 23 * * * 24 Plainly, Q3, in retrospect, took a meaningful hit from anticipation of new 25 product; of the $100+MM shortfall relative to consensus revenues, management attributes perhaps $25MM to the weak Euro, some unit shortage (i.e., 450K vs. 500K in iMacs), 26 but the primary factor that pushed revenues down were lower ASP's due to larger than normal contra revenue/price protection provisions – we estimate this may 27 have been about 250 basis points on the revenue line. Effectively, Apple management took very conservative reserves for price cuts on old lines .... 28

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1 80. On July 20, 2000, Gerard Klauer Mattison issued a report on Apple by David Bailey, 2 which was also based on and repeated information provided at the July 19, 2000 conference. The report 3 increased the forecasted FY00 and FY01 EPS to $1.85 and $2.15, respectively, and the forecasted 4 4Q00 EPS to $0.46. It also stated: 5 Complete refresh of its desktop product line, announced at MacWorld Expo, increases our confidence in Apple's ability to deliver strong revenue and EPS 6 growth going forward. 7 * * * INVESTMENT CONCLUSION 8 We believe Steve Jobs' MacWorld Expo keynote and Apple's analyst 9 meeting highlight many of the company's strengths. Introduction of the G4 Cube and refresh of the company's iMac and Power Mac product lines demonstrate the 10 company's continued ability to create innovative products with features targeted at Apple's core customer segments (consumer, education and design/graphics 11 professionals). 12 81. The uniform affirmative "guidance" Apple presented to various analysts based in large part 13 on Apple's new products, is demonstrated below:

14 July 20, 2000 Analyst Report 4Q00 FY00 FY01 15 Prudential Securities $0.45 $1.84 $2.10 16 Bear Stearns $0.45 $1.84 $2.15 17 DLJ Securities $0.40 $1.79 $2.10 18 A.G. Edwards $0.45 $1.84 $2.09 PaineWebber $0.46 $1.85 $2.10 19 S.G. Cowen $0.46 $1.85 $2.15 20 Gerard Klauer Mattison $0.46 $1.85 $2.15 21 22 82. Utilizing Apple's guidance of 10% revenue growth rate and gross profit margin range of 23 26.8%-27.8% with operating expenses increasing by $15 million with a flat tax rate, as disclosed in Apple's 24 July 18-19, 2000 conference calls, analyst EPS expectations ranged from $0.40-$0.46 for Q400, with the 25 consensus at $0.45. 26 4. July 25-31: Magazine Reaction 27 83. After the Macworld new product announcements and analyst conferences on July 18-19, 28 2000, Apple continued to bombard the markets with positive information about the current state of its

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1 business, its new products and its financial prospects – all designed to support and inflate the price of 2 Apple's stock. 3 84. On July 25, 2000, USA Today ran an article on Apple, arranged by Apple to appear in 4 conjunction with Apple's new product announcements at Macworld. After interviewing and obtaining 5 information from Philip Schiller (Apple's Vice President of Worldwide Marketing), USA Today stated: 6 Last week, [Apple] introduced a flurry of products, from a restyled mouse and keyboard to a striking 8-inch computer called the Power Mac G4 Cube. Apple 7 overhauled the iMac line, adding colors, and introduced a line of warp-speed Power Mac desktops with two microprocessors. 8 * * * 9 Philip Schiller, Apple's vice president of worldwide product marketing [said,] 10 "The whole new (Power Mac) line and refreshed iMacs should maintain sales through the back-to-school season and Christmas." 11 85. The July 31, 2000 edition of Business Week, issued on or about July 25, 2000, also 12 included an article on Apple, arranged by Apple and its public relations agents to appear in conjunction 13 with Apple's new product announcements at Macworld. Jobs and other top Apple executives were 14 interviewed and provided information to the author of the article. In order to generate favorable publicity 15 for the G4 Cube as it was still attempting to release the product, Apple provided specially and carefully 16 selected G4 Cubes to technology writers at key newspapers/magazines to obtain favorable reports and 17 recommendations. These hand-picked G4 Cubes were cosmetically perfect, even though as set forth 18 herein, Apple knew many of the G4 Cubes coming off the assembly line were imperfect, having lines or 19 cracks in their supposedly perfectly clear, pristine crystal cases. As part of Apple's scheme and fraudulent 20 course of business throughout the Class Period, the "perfect" G4 Cube personal computer demonstrated 21 to Business Week was not the result of an effective mass production process. Rather, the G4 Cube given 22 to Business Week was hand-picked and hand-polished to ensure that none of the blemishes (lines and/or 23 cracks) plaguing many of the G4 Cubes coming off the assembly lines were present. The Business Week 24 article stated: 25 It's 10 days before the July 19 MacWorld trade show in New York, where Apple 26 Computer Inc. Chief Executive Steven P. Jobs will once again try to wow the masses .... I'm the reporter he has anointed to get an exclusive sneak peek at this year's lineup of new 27 computers. Clad in shorts and a designer T-shirt, he greets me like an old pal, warmly shaking my hand and ushering me into Apple's boardroom. Scattered around are a dozen 28 or so objects, each hidden coyly beneath a black shroud.

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1 Then comes the climax: an 8-inch, cube-shaped Mac that packs Apple's most powerful technology into a clear plastic case about the size of a toaster.... [T]he 2 Cube's design is a showstopper. "Isn't that beautiful?" he gushes like a dad over his newborn. "It's the most beautiful thing we've ever done." 3 * * * 4 For years, Apple seemed to define gravity. Now it's defying it. Credit Jobs's 5 Midas touch with design and marketing. Both Dell and Compaq recently scrapped colorful iMac knockoffs just months after they were introduced, proving that only Apple 6 knows how to make fashion count when it comes to a computer. And, thanks to the coolness factor, Apple gets away with charging up to 25% more than its 7 competitors for a machine with similar capabilities. That helped give it a juicy gross profit margin of 29.8% in the most recent quarter, tops in the PC segment. 8 * * * 9 Jobs says the company can deliver years of sizzling growth and hefty profits.... 10 Jobs says the company's product pipeline is bulging with goodies that will make this possible .... "There are so many exciting things in our headlights that will take us through 11 the next two to three years...." 12 * * * 13 All told, Apple execs figure this lineup will goose market share. The company already has jumped from a 3.8% share in 1997 to 6% in the combined markets of 14 consumer, education, and artistic professionals. Now Apple execs figure they can hit 10% in five years – growing from $6.1 billion last year to $20 billion. 15 * * * 16 The most striking change has been in operations. When Jobs took over, Apple ended 17 each quarter with some 70 days' worth of finished products sloshing around its factories and warehouses, a $500 million-plus drag on profits that was the worst 18 in the industry. Jobs quickly streamlined. He outsourced manufacturing of half of Apple's products to contractors who could do it far more efficiently, say analysts. That got 19 inventory down to about a month by early 1998. Jobs still wasn't satisfied. 20 * * * 21 [Apple's] biggest claim to fame is getting the inventory of parts down to less than a day – obliterating the record in an industry where weeks or even months is the 22 norm. One reason: Apple has persuaded key suppliers to set up shop close to Apple facilities, for just-in-time delivery. Another benefit of the new system: The 23 entire production process has dropped from almost four months to just two, so Apple can more quickly move to the latest, fastest parts. 24 * * * 25 A clear plastic cover holds the Cube off the desktop. Apple built special 26 injection molding tools to avoid imperfections. "Manufacturing hated us for this," says Jobs. 27 28

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1 86. The July 31, 2000 edition of Newsweek, published on or about July 24, 2000, contained 2 articles about Apple that were arranged by Apple and its public relations agency to appear in conjunction 3 with Apple's new product announcements at Macworld. The articles were based on interviews and 4 conversations with Apple executives including Jobs, who also provided information to the authors of the 5 articles. In order to generate favorable publicity for the G4 Cube as it was still attempting to release the 6 product, Apple provided Newsweek with a carefully hand-picked G4 Cube to obtain favorable reports 7 and recommendations. The hand-picked G4 Cube was cosmetically perfect, even though Apple as set 8 forth herein, knew many of the G4 Cubes coming off the assembly line were imperfect, having lines or tiny 9 cracks in their supposedly perfectly clear, pristine crystal cases. Unbeknownst to Newsweek, the "perfect" 10 G4 Cube provided to Newsweek technology writers was not the result of an effective mass production 11 process, but rather, was hand-picked with none of the blemishes (lines and/or tiny cracks) plaguing many 12 of the G4 Cubes coming off the assembly lines. The July 31, 2000 Newsweek contained an interview with 13 defendant Jobs where he stated: 14 What makes this one [special] for me is not the fact that it's a cube but it's like a brain in a beaker. It's just hanging from this perfectly clear, pristine crystal 15 enclosure. That's what's so drop dead about it. It's incredibly functional. The whole thing is perfect.... It's wonderful to make a pure expression of something 16 and then make a million copies.... There will be a million copies of this out there. 17 Elsewhere, the July 31, 2000 edition of Newsweek summarized Jobs' hype: 18 It is a week before last Wednesday's public unveiling of Apple's new line of desktop computers, and Steve Jobs is stretching his charisma muscles. In a two-hour 19 preview for NEWSWEEK, he displays infomercial skills that would put Cher, Chef Emeril and Ron Popeil to shame. He introduces a new set of iMac colors (Indigo! Ruby! and 20 Snow, which looks like the inside of a light bulb). 21 * * * 22 By the time he pulls back the sheet on the G4 Cube, his intensity gauge has hit the red zone. If computer customers indeed judge books by their covers 23 – and are willing to pay a premium for high style – the $1,800 Cube will hit the best-seller list. 24 * * * 25 But the G4 Cube's most striking visual effect is transparency, in its shell and its 26 components .... Entire teams of engineers had to work on its specially molded plastic, going with an optical-grade polymer that would resist scratches and 27 modulate the way light would refract through the surface. "We were defining details on a chemical level," says [Jonathan Ive, Apple's Chief Engineer]. "It's 28 a sign of where we are as a company that we don't have debates on whether it's

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1 an appropriate use of energy to get the right tolerances, to get exactly the right color." 2 Steve Jobs can go on for quite a while about what he calls "the coolest computer 3 ever." 4 5. Summary of Apple's July 2000 False and Misleading Statements 5 87. In summary, Apple, Jobs and Apple's Senior Officers made positive statements on July 18- 6 19, 2000 to investors, the media and analysts that had no reasonable basis and were false and misleading 7 when made, including: 8 (a) CFO Anderson's statements to analysts on July 18-19, 2000 that Apple would see 9 10% sequential revenue growth in 4Q00 to approximately $2 billion, with 26.8%-27.8% margins, equating 10 to $0.40-$0.45 EPS. 11 (b) Controller Oppenheimer's statement during a July 18, 2000 conference call that 12 Apple's K-12 sales force transition "progressed nicely for us." 13 (c) CEO Jobs' introductions, demonstrations and statements on July 19, 2000 14 regarding the appearance and capabilities of Apple's defective new products, including the G4 Cube and 15 the Power Mac. 16 (d) Media and analysts' dissemination of Apple's 4Q00 financial guidance and positive 17 statements about its new products. 18 B. Reasons Why Apple's Macworld Statements Were False and Misleading When Made 19 88. As set forth above, Apple made false and misleading statements on July 18-19, 2000 which 20 were then disseminated in numerous analyst reports and media from July 20-31, 2000. The statements 21 failed to disclose negative conditions which adversely impacted Apple's business and operations at that time 22 and made it impossible for Apple to meet its financial forecasts in 4Q00. The undisclosed facts are based, 23 in large part, on information provided by 39 confidential witnesses either employed by Apple, its agents 24 and/or its business partners. The confidential witnesses are listed and described by job title below:8 25 CW1: Former Apple Senior Production Supervisor 26 CW2: Former Apple Lead Product Designer 27 8 The detail regarding the basis for confidential witness information is set forth herein and in the 28 "Witness Summaries" attached as an appendix hereto. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 38 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 43 of 116

1 CW3: Former Apple Design Manager employed by Apple third-party manufacturer CW4: Project Manager for Apple third-party manufacturer/developer 2 CW5: Former Apple Senior Project Design Manager CW6: Former Vice President of AppleCare Worldwide Service 3 CW7: Former Apple University Campus Representative CW8: Former Apple Senior Global Supply Manager/Corporate Procurement Transportation and 4 Logistics Manager CW9: Former Apple Frontline Technical Support Representative 5 CW10: Former Apple Customer Service Manager CW11: Former Apple Support Services Manager 6 CW12: Former Apple University Campus Representative CW13: Former Apple University Campus Representative 7 CW14: Former Apple Senior Manager for Developer Support Team CW15: Former Apple Retail Demonstration Representative 8 CW16: Former Apple Rework Technician CW17: Former third-party education technology professional 9 CW18: Former President of Apple third-party education agent CW19: Former Apple K-12 Education Account Executive 10 CW20: Former sales manager for Apple third-party education agent CW21: Former President and owner of Apple third-party education agent 11 CW22: Former K-12 Education Account Executive for Apple third-party education agent CW23: Former Apple Regional Sales Manager 12 CW24: Former Apple Sales Support Specialist for education sales in Canada CW25: Former Apple Business Analyst 13 CW26: Former Test Engineer contracted by Apple CW27: Former Apple Rework Technician 14 CW28: Former Manufacturing Associate contracted by Apple CW29: Former Apple Test Engineer 15 CW30: Former Apple Rework Technician CW31: Former Business Unit Director for major Apple distributor 16 CW32: Former Strategic Marketing Manager for major Apple distributor CW33: Former Director of Product Management for major Apple distributor 17 CW34: Former Apple Contact Center Quality Specialist CW35: Former Contract Technical Support Representative employed by Apple 18 CW36: Apple Senior Director of Higher Education CW37: Former Apple Materials Manager for G4 product line 19 CW38: Former AppleCare Representative at Elk Grove location CW39: Former AppleCare Account Executive 20 1. Apple's Undisclosed Product Problems 21 a. The G4 Cube: Pre-Macworld Design and Production 22 Problems 23 89. Apple pursued a premium pricing policy with respect to the G4 Cube, which was to be 24 radical in design and appearance, contained within a small cube made of pristine, crystal clear 25 polycarbonate plastic. A copy of an Apple advertisement for the G4 Cube, which purportedly showed the 26 physical appearance of the product, is attached hereto as Exhibit A. Apple intended the G4 Cube to retail 27 for approximately $1,800-$2,300 without a monitor, an extremely high price for the G4 Cube's actual 28 performance capabilities compared to competitive PC products. Apple knew that in order for the G4

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1 Cube to succeed at this otherwise uncompetitive price level, it would have to sell in large part due to its 2 strikingly unusual physical appearance. 3 90. Apple had never before manufactured a product like the G4 Cube, a product that 4 demanded rigid and unforgiving tolerances to fit in the "form factor" of a clear case surrounding the CPU. 5 The plastic Apple used for the G4 Cube possessed features making it extremely difficult to produce corners 6 or bends without getting mold lines, tiny cracks or crazing, which spoil the "crystal clear," "pristine" 7 appearance. Defendants knew, however, that producing defect-free, cosmetically perfect G4 Cubes was 8 indispensable to the success of the product, as customers would be purchasing the product based on its 9 strikingly unusual look and would be turned off by even the most minor cosmetic blemishes or 10 imperfections. 11 91. According to one of Apple's Senior Production Supervisors (CW1), in attempting to 12 manufacture the G4 Cube, Apple was forced to use more radical and complex manufacturing techniques 13 than it had used in the past, including special molds and injections processes which were exceptionally 14 difficult to achieve. CW1 explained that during the final design and test manufacturing processes for this 15 new G4 Cube computer, Apple discovered that due to an overly demanding design, Apple was not able 16 to effectively control or manipulate the difficult raw material and manufacturing process involved. As a 17 result, significant numbers of the G4 Cubes coming off the assembly line had mold lines, crazing or tiny 18 cracks, which spoiled their appearance. 19 92. In fact, during the injection molding process, when the liquid polycarbonate plastic flowed 20 into the case mold and around the opening for the rivets on the top of the case and the DVD drive opening 21 and then came back together, it formed mold lines, crazing and tiny cracks. According to the Lead Product 22 Designer for the G4 Cube (CW2), the mold lines were impossible to eliminate. 23 93. The mold line problem was further exacerbated by the thickness of the case walls. The 24 weight of the enclosed computer hardware placed excess stress on these areas of the case, causing or 25 aggravating existing cracks after completion of the assembly process. 26 94. Further, according to Apple's Senior Production Supervisor (CW1), due to the Cube's 27 design, all of the various components (i.e., processor, memory, video boards and port connectors) were 28 very different from any other Macintosh tower computers. For the other "tower" G4 models that Apple

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1 produced, all of the components were placed in the same location during manufacturing. CW1 noted that 2 the atypical physical placement of the internal components in the G4 Cube required significant adjustments 3 to several of Apple's automated assembly machines and instruments. Additionally, CW1 stated that various 4 hand-held tools were specially designed and built to work with the Cube's unique components. According 5 to CW1, all of these manufacturing issues slowed production, causing severe delays to the Cube's planned 6 release. 7 95. Apple also faced another impossible task with the G4 Cube: because Jobs insisted that the 8 G4 Cube be designed without a fan, the compact arrangement of the computer's electrical components 9 caused severe overheating problems which were not solved until after the Class Period, if ever. According 10 to a Test Engineer contracted by Apple for the G4 Cube project during the Class Period (CW26), the G4 11 Cube suffered from overheating problems from June 2000 to February 2001. CW26 stated that the G4 12 Cube overheated if placed on its side or was in a poorly ventilated room. CW26 noted that Apple 13 performed pre-production testing using metal cases. Another former Apple Test Engineer (CW29) stated 14 that some G4 Cubes were tested without cases. Thus, the Cubes eventually shipped to customers were 15 more likely to overheat than the pre-production models. Indeed, CW26 reported one incident where one 16 G4 Cube that had been running for two hours caught on fire. CW26 stated that two revisions of the 17 motherboard design were made prior to final production in an attempt to fix the heat problem. The 18 revisions were merely "band-aids" according to CW26, because the heat problem was not completely 19 solved. CW26 stated it was impossible for upper management not to know about the heating problem, 20 because everyone involved in the project at Apple was talking about it and the problem was placed on 21 RADAR, Apple's real-time bug tracking system. CW26's information was based on his/her direct 22 experience with testing the Cube prior to and during the Class Period and his/her personal experience using 23 RADAR. 24 96. A former Apple Rework Technician (CW27) corroborated CW26's information regarding 25 the Cube's defective internal design and overheating problems. CW27 noted that the chip on the 26 motherboard that handled "Firewire" data transfers produced too much heat. CW27 stated that this heat 27 was intensified by the fact that the Cube did not have an internal fan. Thus, CW27 was directed by his/her 28 superiors to replace the entire Cube motherboard hoping to solve the heat problem. According to CW27,

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1 however, the problem was not solved during the Class Period and Apple had to redesign the entire 2 motherboard for the G4 Cube and relocate the "Firewire" chip. CW27 stated that the redesigned 3 motherboards were not available until October 2000. Thus, Apple shipped G4 Cubes to customers before 4 the redesigned motherboards were implemented, guaranteeing that customers would suffer problems with 5 overheating. 6 97. In addition, CW27 stated that there was a shortage of motherboards for the G4 Cube, 7 causing workers in his/her building to "stand around" waiting for new supplies. CW27 stated that Apple 8 had to "break down" a Cube line every month to build a different product while Apple tried to fix its 9 motherboard supply problems. A former Apple Manufacturing Associate during the Class Period (CW28) 10 confirmed that there was a shortage of both motherboards and plastic cases for the G4 Cube during his/her 11 Cube assignment (June-September 2000). CW28 stated that the parts shortages caused Apple an average 12 of one week of downtime per month during his/her Cube assignment. CW28 stated that it was common 13 to come to work on a Monday, yet the lack of Cube parts would prevent CW28 from working until 14 Thursday. CW28 also stated that Apple did not have an effective inspection process for Cube production 15 and did not perform quality control as a separate function until September 2000. CW28 recalled one 16 instance where 500 Cubes were found to be defective and had to be reworked because the cases were 17 out of mechanical tolerance. All of these problems resulted in the Cube being late to market. 18 98. The various defects described above plagued Cube production. According to a former 19 Apple Industrial Design Manager now employed by one of Apple's third-party manufacturers/developers 20 (CW3), the unique manufacturing problems with the G4 Cube casing resulted in a "reject rate" of over 21 50%. CW3 stated that such a reject rate was "extremely high" and resulted in project delays of up to six 22 months. According to a Project Manager for Shinei International, one of Apple's third-party 23 developers/manufacturers of the G4 Cube (CW4), Apple sent design teams to Taiwan to monitor the G4 24 Cube project at every major milestone during Cube development. According to CW4, the design teams 25 requested changes to the project after the design was already frozen and at subsequent steps along the 26 development process, causing serious tool manufacturing problems and project delays. CW4 stated that 27 the mold and knit lines on the Cube's casing were directly attributed to changes made by Apple after tools 28 were completed and the Cube was ready to produce. Indeed, the former third-party Design Manager

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1 (CW3) confirmed that Apple's Vice President of Industrial Design, Dan Riccio ("Riccio"), and Vice 2 President of Product Design, Jonathon Ive, were in Singapore for one month during Cube development 3 personally approving each part. According to CW3, the changes made by Apple's industrial design team 4 only made things worse. CW3 also stated that Riccio and Ive were pressuring the Lead Product Designer 5 for the Cube (CW2), which is one of the reasons CW2 left Apple. CW2 confirmed that manufacturing 6 delays caused the G4 Cube project to last 12 months when it was originally scheduled for six to eight 7 months. As a result, Apple had to rush production and was never able to resolve the G4 Cube's defects. 8 99. As for the cosmetic issues, former Apple Senior Production Supervisor (CW1) recalled 9 that at least 75% to 80% of all the Cubes CW1 saw had some cosmetic imperfection. CW1 recalled 10 witnessing technicians assembling and polishing Cubes by hand and believed that because of this labor- 11 intensive process, the Cube was not fit for Apple's planned mass production. 12 100. A former Apple Senior Project Design Manager during the Class Period (CW5) stated that 13 as late as June to early July 2000, the Cube's Lead Product Designer (CW2) was having problems with 14 the highly-complex low-tolerance manufacturing process called for in making the G4 Cube enclosure, due 15 to the problematic heat injection molding process. CW5 based this information on his/her position at the 16 Company and personal discussions with CW2. According to CW5, the discussion took place at an 17 off-campus restaurant in late June 2000 or very early in July 2000 during a lunch break at a project design 18 manager meeting held at Apple's main campus. During the discussion, CW2 disclosed that the Cube 19 project was having problems, mainly due to the heat injection process. CW2 also reported to CW5 that 20 he/she was "getting heat" from his/her superiors to resolve the problem prior to Macworld. 21 101. Former Vice President of AppleCare for Worldwide Service (CW6) confirmed that Apple 22 used RADAR to log, track and rank known "bugs" and problems. The known problems were reviewed 23 during engineering meetings and were ranked according to urgency. CW6 noted that CEO Jobs was 24 notified of the "Class A bugs," or bugs that were considered to be of "line-stopping urgency." According 25 to CW6, RADAR continued to track bugs 90-120 days after product release. He/she stated that the 26 "Vantis" call center application would maintain case-specific information. The cracks in the G4 Cube were 27 listed as a Class A bug. 28

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1 b. Post Macworld: Cube Problems Intensify in August and September 2000 2 102. Apple continued to struggle with the manufacturing and supply problems into August 2000, 3 and the Company was never able to mass produce G4 Cubes that were pristine and crystal clear as 4 represented and as necessary for commercial success. Indeed, according to an Apple Senior Global 5 Supply Manager/Corporate Procurement Transportation and Logistics Manager (CW8), soon after the 6 Macworld New York presentation in July 2000, Apple's manufacturing line for the Cube was completely 7 shut down for one to two weeks while changes were made to solve the mass-production problems. CW8 8 stated that the manufacturing obstacles were so great that Apple debated whether or not to ship the G4 9 Cube at all. Apple eventually abandoned its attempt to mass produce the G4 Cube on July 3, 2001. 10 103. The major component supply problems for the G4 Cube also intensified in August. 11 According to Apple's Materials Manager who was directly responsible for all material planning and product 12 issues for the G4 Cube (CW37), supply was severely constrained by a lack of plastic Cube cases causing 13 major delays in ramping Cube production after the first Cubes shipped in August 2000. CW37 knows this 14 because he/she managed the worldwide materials teams that supported the development, manufacturing 15 and distribution of G4 products. According to CW37, daily reports were generated detailing the production 16 quantities and materials shortages which were emailed directly to Senior Vice President of Worldwide 17 Operations Cook. 18 104. A Business Unit Director for one of Apple's largest distributors (CW31), confirmed that 19 there was a shortage of Cubes from the time of first shipment in August 2000 well into 2001. As a basis 20 for this statement, CW31 drew from his/her experience in selling Cubes as a Business Unit Director, 21 responsible for $20 million in Apple sales per month for the southwest region supporting 230 accounts. 22 CW31 also noted that the Cube shortage sticks in CW31's mind because he/she could not find a G4 Cube 23 to buy for his/her son for Christmas. A Group Manager for the distributor (CW32), and a former Director 24 of Product Management for the same distributor (CW33), both confirmed the supply shortage of G4 Cubes 25 during the Class Period. 26 105. CW31, the former Business Unit Director for the distributor, stated that after the Cube's 27 release, it took months for Apple to supply enough Cubes to meet demand. Until then, Cubes were placed 28

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1 on allocation for the distributor's customers. CW32, a Strategic Marketing Manager for the distributor, 2 confirmed that there were shortages of Cubes for several months after the product was introduced in 3 August 2000. CW32's statement was based on his/her position as the person responsible for distributing 4 Cubes to hundreds of Apple resellers during the Class Period. CW32 also confirmed CW31's statement 5 that the Cube was on allocation for the distributor's customers. 6 106. Even the Cubes that Apple was able to supply in 4Q00, however, suffered from the power 7 switch design defect and cracking in the case, and many Cubes had to be sent back to Apple for 8 replacement and repairs. These repairs and returns undoubtedly hurt Apple's gross margins and its bottom 9 line, making its 4Q00 projections even less reasonable. Indeed, according to an Apple Contact Center 10 Quality Specialist from February 1993 until May 2001 (CW34), the most frequent problem expressed by 11 G4 Cube customers during and after the Class Period was that the Cube would power off with no warning. 12 CW34 confirmed that the problem was caused by the power switch sensor, which was located on the top 13 of the Cube and was too heat-sensitive. According to CW34, the defect was so prevalent that Apple had 14 to ultimately place a gasket between the power switch and the case to make the sensor less sensitive. 15 CW34 also confirmed that customers complained about cracks in the Cube's casing and that it was 16 common practice for Apple to replace defective cases. 17 107. Also, unbeknownst to customers, the G4 Cube's power switch and other components 18 became misaligned during shipment, resulting in the product unexpectedly powering down during operation. 19 Ex. E. This shipment defect resulted in further customer complaints and demands for returns or refunds. 20 108. An Apple Support Services Manager for the Pacific Northwest region (CW11) confirmed 21 that initial customers had problems with the G4 Cube's "hypersensitive" power switch immediately. CW11 22 explained that when any form of electricity passed over the switch – such as a metal pen or a hand – the 23 switch would turn on/off. According to CW11, Apple attempted to remedy the problem with "depot only" 24 solutions, i.e., the customer was required to send the G4 Cube back for repair (corporate customers 25 exempted). CW11 stated that customers were not thrilled about the solution because they did not have 26 access to their computers for over a week and dealers could not order replacement parts ahead of time. 27 According to CW11, the power switch problem was apparent very early on by early purchasers. A former 28 Apple Rework Technician (CW27) confirmed Apple did not implement an effective solution to the power

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1 switch problem until approximately November 2000. See also Ex. G. Again, the pressure to release its 2 new products was too great, and Apple chose to knowingly ship defective products during 4Q00 rather 3 than wait for an engineering fix. 4 109. CW9, one of Apple's Frontline Technical Support Representatives during the Class Period, 5 confirmed that customer complaints began immediately after the G4 Cube's release. According to CW9, 6 customers complained both about the Cube and the new Power Macs. With respect to the Cube, CW9 7 stated that he/she personally handled 25 complaints per week related to cosmetic imperfections in the Cube 8 casing immediately after the Cube's release and continuing steadily through the remainder of the fall. CW9 9 was required to keep a daily call log with detailed journal entries of each customer call. The log listed the 10 caller's name, the Apple product in question, the nature of the caller's inquiry, length of call and how the 11 inquiry was resolved. The log was then submitted to CW9's supervisor and Director of the Customer 12 Support Center, Dave Thornton, at the end of each shift. Thornton would then prepare a shift report 13 containing all daily calls. CW9 stated that call logs were used by the Company to track customer 14 responses to products and monitor the scope of technical and quality issues. CW9 also stated that front 15 line representatives would be disciplined if they didn't submit their daily logs. 16 110. In addition, CW9 stated that customers complained about the Cube's defective power 17 switch, which randomly shut down and erased data due to either overheating or simply losing power for 18 no reason. With respect to the new Power Macs, CW9 stated that customers complained about the speed 19 of the dual processor and that the Power Mac was not easily expandable. 20 111. CW9 stated that Jobs and Apple's senior executives were aware of the problems with both 21 the Cube and Power Mac. CW9 stated that almost concurrent with the G4 Cube's preliminary release, 22 Apple took the "unusual" step of sending a memorandum (the Product Defect Memo) to its front-line 23 representatives and team supervisors who fielded calls from irate customers. According to CW9, the 24 Product Defect memo was sent in early August 2000 and acknowledged that Apple was aware of 25 problems with the G4 Cube and Power Mac. CW9 stated the Product Defect memo advised employees 26 of the problematic issues and provided instructions on how to address customers who called to complain. 27 The memo also instructed employees on how to respond to customers who demanded refunds or 28 replacements. Finally, the Product Defect memo advised representatives to "expect" a larger than usual

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1 number of calls from G4 Cube owners due to the Cube case and power switch problems. CW9 noted that 2 the memo was unusual because during his/her employment, Apple rarely sent out written notification of 3 product issues. 4 112. A former AppleCare Representative responsible for fielding and processing customer 5 inquiries regarding performance and technical issues (CW38) also received the Product Defect memo in 6 August 2000. CW38 stated that the Product Defect memo was generated from Rubinstein's office and was 7 distributed to AppleCare representatives as well as frontline customer support technicians. CW38 also 8 recalled that several other senior managers and executives were copied on the memo. CW38 stated that 9 the memo contained a detailed description of the power switch problem and cosmetic imperfections. 10 CW38 also stated that the memo provided instructions and directions for how to process consumer 11 complaints. The fix for the defective power switch was not corrected until the end of 2000, according to 12 CW38. CW38 noted that Apple sold "several thousand" Cubes prior to the purported design fix. 13 According to CW38, the memo was "odd" because it was sent prior to release of the Cube. CW38 also 14 noted that it was highly unusual for Apple to disclose any type of technical or production problem before 15 the product "hit the street." Based on CW38's experience with the Company's internal reporting 16 procedures and the substantive nature of the Product Defect memo from Rubinstein's office, CW38 was 17 convinced that Jobs and other senior officers knew about the problems with the Cube and Power Mac 18 prior to public release. 19 113. According to Apple's former Senior Production Supervisor (CW1), Rubinstein also sent 20 a "call to arms" memorandum in early August 2000 to supervisors in production and engineering directing 21 them to ramp up production of the Cube, despite the defects (the "Call to Arms memo"). CW1 stated that 22 when he/she departed after receiving the memo, the Company was still behind schedule and had not 23 released the Cube to the market. As discussed infra, later that month, Rubinstein unloaded all the Apple 24 shares he held (100,000 shares) for proceeds of $5.9 million – his largest single sale of Apple stock ever. 25 The August 2000 Call to Arms memo is direct evidence that Apple knew the Cube production was 26 severely delayed and would prevent Apple from selling (or even shipping) enough Cubes to meet 4Q00 27 guidance. 28

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1 114. A former Apple Customer Service Manager (CW10) further stated that shortly after the 2 introduction of the G4 Cube, Apple began receiving many customer complaints regarding cracks and mold 3 lines in the G4 Cube's casing. The complaints were internally classified as a "known issue," meaning Apple 4 had received enough complaints to be fully aware of a problem and "anyone who had a reason to know, 5 knew." Indeed, CW10 reported that Apple internally posted suggestions online as to how employees 6 should handle customer complaints. 7 115. Apple also suffered embarrassing problems with some of the G4 Cubes used in product 8 demonstrations to potential customers. For example, a former Apple Campus Representative (CW12) 9 received a demonstration G4 Cube in September 2000 to present to his/her higher education customers. 10 According to CW12, the G4 Cube quality problems were immediately apparent to both the Company's 11 campus representatives and potential customers. CW12's demo Cube suffered from cracks in the casing 12 and two other manufacturing defects. CW12 eventually determined that the demo Cube was unfit for 13 presentations to the educational institutions, and communicated his concern to his immediate supervisor, 14 Apple Account Executive, Gary Dauphin. CW12 was then told that Apple could not immediately 15 replace the machine. CW12 could not recall why the Company could not replace the machine, but 16 vaguely recalled Dauphin explaining that the Company was aware of the case problems and was trying to 17 resolve them. In the meantime, Dauphin told CW12 to use the defective demo for the presentation and 18 to convey to the institutions that the Cube was not reflective of what the customer would receive. 19 116. Another University Campus Representative (CW7) received a demonstration G4 Cube 20 in September 2000. CW7's G4 Cube also suffered from several hairline flaws along the side and top of 21 the casing. CW7 stated that his/her supervisor, Apple Account Executive, Laurie Coiclithero, arranged 22 for a replacement demo G4 Cube which arrived approximately three weeks later. CW7 stated that the 23 "blemishes" on the Cubes were obvious to potential Apple customers. CW7 also stated that he/she spoke 24 with an Apple account executive at least two to three times per week and was required to submit a weekly 25 update to Apple's headquarters via email which contained specific activities performed and hours worked. 26 CW7's supervisor would compile all campus representative weekly reports and forward them to James 27 Marshall, Vice President of Educational Sales. 28

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1 117. A third University Campus Representative (CW13) described the G4 Cube casing as a 2 "PR nightmare" because of the cosmetic flaws and the delay in receiving replacement products. The G4 3 Cube demo CW13 received in September 2000 had three imperfections in the casing. Two of the flaws 4 were on the front right side of the casing. One flaw was on the top of the casing near the vent fan. The 5 foregoing facts confirm that Apple was still having manufacturing problems with the G4 Cube as late as late 6 September 2000, which it could not remedy in time to sell 150,000 Cubes by the end of 4Q00 on 7 September 30, 2000. 8 118. Indeed, the power switch and overheating defects were not cured until well after the Class 9 Period, according to a former contract Technical Support Representative (CW35). CW35 was told by 10 his/her supervisor upon arrival in November 2000, that Apple was still experiencing significant quality and 11 performance problems with the G4 Cube and Power Mac. CW35's supervisor also stated that Apple 12 "miscalculated" the readiness of the Cube and Power Mac in July - August 2000. CW35 stated there was 13 a "prevalent feeling" among Apple technical support personnel that the Cube and Power Macs were not 14 ready for public release. Several Apple employees reported to CW35 that there was significant pressure 15 on the Company's design group and production department to get the Cubes and Power Macs ready for 16 Macworld. 17 119. CW35 also stated that he/she processed "a lot" of Cubes and Power Macs for repairs 18 while employed by Apple. Numerous returns and customer complaints were due to the defective and 19 broken power switches on the G4 Cube and sudden power losses which erased data. CW35 repaired 20 numerous Cubes that were returned because of the defective power switch. CW35 attempted to repair 21 the power switch using a "bolt and bracket" which was far more stable than the original anchor piece used 22 in the initial construction of the Cube. The problems, however, persisted throughout CW35's employment. 23 CW35 also noted that Apple was not prepared for the amount of customer repairs and returns related to 24 the G4 Cubes and Power Macs. It is important to note that the problems witnessed by CW35 occurred 25 after the Class Period, which confirms that the problems were not solved by the time any of Apple's false 26 statements were made. Indeed, documents posted on Apple's website during and after the Class Period 27 indicate the problems were not completely fixed. Apple's own documents confirm this. See Exs. E-G. 28

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1 120. A former AppleCare Account Executive (CW39) stated that he/she read a memo from the 2 design or engineering department which admitted that the plastic port used for the power switch had not 3 been properly bored out. CW39 stated that the problem was not permanently corrected by the end of 4 2000. 5 121. Thereafter and throughout the Class Period, Apple continued to have difficulties in properly 6 constructing and mass producing the G4 Cube due to imperfections in the case, defects in the configuration 7 of the Cube's components and power switch and supply problems. The difficulties resulted in the 8 production of excessive numbers of defectively designed and imperfect G4 Cubes with defective power 9 switches and cosmetic blemishes in what was supposed to be the crystal clear, pristine, perfect plastic 10 casing. The defects were so serious that many of the G4 Cubes produced were not commercially 11 acceptable. As a result, G4 Cubes could not be produced in quantity as planned, and the product was late 12 to market in quantity. Indeed, according to a September 6, 2000 Prudential analyst report, retail checks 13 indicated that Cubes had not generally reached retail shelves in quantity and would not do so until mid- 14 September. Yet Jobs had told Macworld they would be available in early August 2000, and Apple stated 15 in August 2000 that shipment and availability of its new products were "on plan." This delay meant Apple 16 would not sell anywhere near the 150,000 G4 Cubes it needed to reach its announced revenue projections 17 for 4Q00, even assuming strong demand. 18 122. Throughout the Class Period, therefore, Apple failed to disclose the following facts 19 regarding the problems it was having with production and shipment of the G4 Cube, which rendered its 20 4Q00 forecasts impossible: 21 (a) Cosmetic Defects: Apple could not perfect the unique manufacturing obstacles 22 and special injection molding processes to produce a "perfectly clear," "crystal enclosure" necessary to sell 23 the overpriced G4 Cube. Thus, most of the Cubes suffered from visible mold lines, cracks, scratches and 24 cosmetic stress fractures caused by the weight of the hardware suspended in the casing, resulting in 25 thousands of customer complaints and returns/exchanges. 26 (b) Internal Component Design Defects: Apple could not configure the Cube's 27 internal components due to the overly compact design and Jobs' insistence that the Cube be designed 28 without an internal fan. Thus, the Cube suffered from overheating problems and random power shutdowns.

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1 (c) Power Switch Defects: The Cube's power switch was defectively located and 2 designed in a way that caused frequent and spontaneous shutdowns due to heat sensitivity from normal use. 3 (d) Power Switch Shipment Defects: The Cube's power switch was designed in 4 a way that caused misalignment during shipment, resulting in frequent power crashes and random deletion 5 of data. 6 (e) Component Supply Problems: The unique design of the Cube's components 7 caused severe shortages of plastic cases and motherboards, such that production of Cubes was delayed 8 into September 2000, and Apple shipped Cubes knowing they were defective. 9 c. The Power Mac 10 123. Another of Apple's new computer products introduced at Macworld was the Power Mac. 11 The Power Mac contained two microprocessors which purportedly performed dual tasks simultaneously 12 (this technology was also contained in higher-end versions of the G4 Cube). Apple and Jobs represented 13 that the dual microprocessor architecture allowed the Power Mac to operate faster than any competing line 14 of personal computers. According to CEO Jobs, the Power Mac had "awesome power" and was a "whole 15 new class of machine," because "two brains are better than one." 16 124. What Jobs knew and did not disclose, however, was that the new Power Mac suffered 17 major operating defects that would drastically reduce demand and sales of the product in 4Q00. First, the 18 Power Mac came equipped with an operating system (OS 9) that lacked the software applications to 19 effectively recognize and take advantage of the dual processor technology. OS 9 could not recognize the 20 dual processors without special software, and very few software applications were written to take 21 advantage of multiple processors. A Senior Manager for Apple's Developer Support Team during the Class 22 Period (CW14) thus stated that Apple faced a catch-22: customers were not purchasing Power Macs 23 because they could not utilize the multiple processor function, and it was unprofitable for software 24 developers to write applications for the dual processors because they were not selling. 25 125. According to a former Apple Support Services Manager (CW11), Apple's new operating 26 system, OS X (released to the public in 2001), could purportedly take advantage of the dual processor 27 technology without additional software applications. CW11 stated that Apple originally planned to release 28 OS X in 2000 to coincide with the Power Mac launch, but it was delayed a year and Apple could not get

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1 it to market in time. Thus, many customers deferred purchasing Power Macs because it essentially 2 performed no better than the prior version Power Mac, which was less expensive. 3 126. Indeed, within 72 hours of the Macworld extravaganza, Apple began addressing the 4 problems, quitely, only to people who were tricked into buying the promise of dual processor speed. 5 Importantly, Apple only gave out the bad news to people who had already bought the dual 6 processor! On July 21, 2000, Apple posted a "Document" to its "AppleCare Knowledge Base" that 7 described "Power Mac G4 (Gigabit Ethernet): Applications That Do Not Utilize Dual Processors." The 8 document minimized the problems stating "how applications not optimized for dual processors run on a 9 Power Mac G4 (Gigabit Ethernet) computer with dual processors," and stated, in total, as follows: 10 An application that is not optimized to utilize both processors in a Power Mac G4 (Gigabit Ethernet) computer will function just as if it were running on a single processor computer. 11 Mac OS X, and applications written specifically for Mac OS X, are optimized for dual 12 processing. 13 See Ex. I. 14 127. The problem Apple customers faced, however, was the Apple did not release Mac OS 15 X until March 24, 2001 – - more than eight months later. Therefore, at the time of the release of the 16 new Power Mac, only the rare applications written specifically for it (such as Adobe Photoshop, which 17 Jobs misleadingly showboated at Macworld) would have any benefit. 18 128. Given Jobs' meticulous oversight of Apple's new products which manifested immediate 19 problems, and given that Apple was telling its customers, formally, that their computer hardware had 20 outstripped their software's capacity, Jobs statements concerning the Power Macs were knowingly false 21 when made. 22 129. Further hampering sales of the Power Mac was its slow clock rate of 500 MHz. The dual 23 processor could not make up for the slow speeds because the architecture of the Power Mac could not 24 utilize Symmetrical Multiprocessing. Customers realized that without the ability to utilize the dual processing 25 function, the capabilities of the new Power Macs were nearly the same as the previous version of the single 26 processor Power Macs, yet were priced much higher. This caused a severe decrease in demand for the 27 new Power Macs as customers shifted to buying the less costly single processor Power Macs. 28

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1 130. On August 10, 2000, Appleinsider.com published an article confirming that Apple was 2 suffering from chip speed problems well into the Class Period: "Come Seybold San Francisco this 3 month, Apple's Power Mac G4 systems will have officially been stuck at an industry trailing 500 4 MHz clockspeed for an entire year." 5 131. Thus, Apple and Jobs knew that the speed of the new Power Mac was behind the 6 competition prior to Macworld. Apple and Jobs also knew, however, that due to lower-than-expected 7 3Q00 financial results, they needed to impress the Macworld crowd with an array of new products. So 8 Apple and Jobs concealed the speed and operability defects in the Power Mac during Macworld 9 demonstrations by using Adobe Photoshop, one of the rare software programs capable of capitalizing on 10 the dual processing function. Thus, the public was misled into believing the dual processor function worked 11 seamlessly with any software. 12 132. Indeed, a Retail Demo Representative for Apple during the Class Period (CW15) noted 13 that strong initial demand for the new Power Macs generated by Apple's promotions and media hype 14 greatly diminished after customers made serious evaluations of the product. CW15 recalled many 15 customers questioning the speed of the Power Mac, its compatibility with complex software applications 16 and the high price for a product no more technically advanced than its competition. Apple and Jobs knew 17 of this because CW15 prepared an "event report" at the conclusion of all demonstrations, documenting 18 customer concerns and complaints about the Power Macs. The event report was submitted to Apple's 19 headquarters 48 hours after each event. 20 133. A former Apple Frontline Technical Support Representative (CW9) and a former Rework 21 Technician for Apple during the Class Period (CW16) also acknowledged large numbers of customer 22 complaints about the performance of the new Power Macs immediately after release in August 2000. 23 CW16 noted that while Apple represented that the dual processor design allowed users to operate with 24 extremely high speeds, the exact opposite was true. The two processors were slow to respond to user 25 commands and did not operate in a coordinated fashion. CW16 also stated that there was a "problem" 26 where the dual processors would "knock each other out" when performing multiple functions, causing the 27 computer to frequently shut down. CW16 believed the root cause of the problems was due to Apple's 28 release of "a lot of product before it was fully tested." CW16 explained that the number of component

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1 defects was "higher than it should have been." Another former Apple Rework Technician (CW30) stated 2 that he/she was told that there was a fundamental problem with the new Power Macs, in that the dual 3 processor was not stable when advanced software programs were run simultaneously. 4 134. According to a former Apple Frontline Technical Support Representative (CW9) and a 5 former AppleCare Representative (CW38), Apple was aware of the Power Mac performance problems 6 because of the Product Defect memo sent by Rubinstein in August 2000 which acknowledged both the 7 Cube defects and the performance problems with the Power Mac and provided instructions for handling 8 customer complaints. 9 135. A former contract Technical Support Representative (CW35) confirmed that the problems 10 with the Power Macs persisted after the Class Period. Many customers still complained that the dual 11 processor was slow and not easily expandable. Based on customer complaints and feedback cards, 12 CW35 stated that the dual processor was functionally limited. 13 136. The Power Mac's slow clock speed compared with competing products and the software 14 and operating system compatibility problems caused a severe reduction in demand and a mix-shift to lower- 15 priced Power Macs, furthering Apple's 4Q00 shortfall. Indeed, in an October 19, 2000 report, analysts 16 at Credit Suisse First Boston confirmed the problem and the impact on 4Q00: 17 The third problem was an unexpected mix skew toward the low end of the G4 Power Mac professional desktop line. This was a new development – typically, on all of 18 Apple's product lines, mix skew to the high end. However, the high end of the Power Mac lineup is the dual-processor model, which adds little in performance over single 19 processor models because the current incarnation of the Macintosh OS, 9.0, cannot fully take advantage of two chips. Only with OSX early next year comes 20 such functionality as SMP (symmetric multiprocessing, or the ability to assign and spread computing tasks over multiple chips), which is necessary to fully enjoy 21 the advantages of multiple chips. 22 d. The iMac 23 137. Another contributor to Apple's poor 4Q00 results was a reduction in sales of the new line 24 of iMac personal computers. During research for its upgraded iMac line, Apple learned that for a personal 25 computer in the iMac's price range, consumers would demand a rewritable CD drive – a feature necessary 26 for users to create customized music collections and to store home movies, two increasingly "hot" personal 27 computer uses. However, the new iMacs lacked this feature and Apple did not have time to add the 28 feature prior to Macworld. Also, Apple had learned that consumers increasingly preferred and demanded

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1 a 17-inch monitor of the type then being offered by Dell and Compaq. The iMacs, however, came with 2 15-inch monitors – a fact Apple could not change prior to Macworld because the monitor was integrated 3 into the unit. 4 138. According to Jobs at Macworld, "we do a lot of market research." Yet Jobs later admitted 5 that "Apple completely missed the boat on CD read/write drives. Both HP and Compaq ship 6 approximately half of their computers with CD read/write drives. Apple ships none. We just blew this 7 one." Plaintiffs do not take issue, however, with Apple's poor business decision surrounding the iMac 8 features. Plaintiffs allege that the slowdown of iMac sales during 4Q00 combined with the customer mix- 9 shift to lower-priced Power Macs (due to dual processor problems) resulted in increasing inventories and 10 pricing and charges taken directly to Apple's margins and 4Q00 bottom line. Yet, as set forth in ¶¶176- 11 179, infra, Apple continued to tout its inventory efficiency through August 2000, telling analysts that 12 inventory was being effectively managed and all pricing action to clear inventory had been taken and no 13 further action would be necessary. This was not true as Apple finished 4Q00 with three to five weeks of 14 extra inventory glut, took reserve accruals against cost of sales for pricing action to promote sell-through 15 in 1Q01, and suffered supply cancellation charges due to lack of demand and sales. Gross margins 16 therefore took a hit of approximately 2.0% in 4Q00 directly contributing to Apple's dismal $0.30 EPS. 17 139. Further, Apple's knowledge that it "missed the boat" with the iMac features was merely one 18 of several negative factors, including the Cube design and production problems, Power Mac performance 19 problems and the K-12 sales "train wreck," which seriously undermined the accuracy of Apple's 4Q00 20 projections. Based on Apple's mishap, iMac sales in the United States dropped 30% in 4Q00, contributing 21 to an already ballooning inventory position which ultimately contributed to Apple's overall financial shortfall 22 in 4Q00. 23 2. Apple's July 18, 2000 Statement that Its K-12 Sales Force Transition Had "Progressed Nicely" Was False When Made 24 140. Less than three weeks before Jobs took the stage at Macworld, Apple jettisoned all of its 25 independent K-12 educational sales agents in favor of a "direct sales" model that was in the process of 26 killing the Company's leadership position in educational sales. On April 15, 2000, Apple told the agents, 27 some of whom had represented Apple in their geographic regions since the 1980s, that they had until June 28

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1 30, 2000 to generate their final sales commissions. After that date, the agents would be fired. On July 18, 2 2000, Apple stated to analysts that the sales force transition in K-12 had "progressed nicely." The truth 3 told a different story. 4 a. The Role of Apple's Agents 5 141. Educational sales regularly accounted for up to one-third of Apple's revenue, and 6 historically had been one of the main reasons for the Company's success. For decades, Apple had relied 7 on regional third-party "sales agents" to promote its products to the general K-12 market. The agents sold 8 Apple computers exclusively, "adding value" to their products and services by installing the computers, 9 servicing the installed base, and then consulting with customers about which computers and software were 10 right for each individual school. Each of the independent agents were contractually limited to sales in a 11 distinct geographic area around the United States or Canada, and renewed the contract at the end of 12 Apple's fiscal year. The independent sales agents were extremely experienced and had built and cultivated 13 substantial relationships with public school districts and private school purchasers that were integral to 14 maintaining Apple's market share. The relationships helped Apple become the top education seller in the 15 personal computer industry. 16 142. The Apple/agent relationship was symbiotic. Although Apple sold only the computers and 17 some software, the agents provided a "turnkey solution" to schools above and beyond just the Apple 18 computers. Agents developed personal relationships with the schools, selling them the switches and hubs 19 for routing data and networking printers, helping them develop installation and upgrade strategies, and 20 identifying third-party peripherals and software that met schools' needs. The contract between Apple and 21 the agents required agents to sell Apple computers exclusively, guaranteeing that the agents would promote 22 only Apple's interests. 23 143. This relationship was especially important given the trend toward Windows-based personal 24 computers ("PCs"). According to CW17, a technology professional who worked with Apple's agent 25 represented schools for the Northeastern United States, teachers wanted Apple products, but the school 26 district information technology ("IT") departments preferred Windows-based PCs. 27 144. Thus, the third-party agents' product and service offering was an important reason why 28 schools stuck with Apple. For example, one of the agent companies, Holcombs Education Resources

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1 ("Holcombs") offered its schools access to an entire division of engineers and problem solvers, with more 2 than 90 people (including the sales people) actively supporting the schools' needs after the sale of 3 computers was completed. According to Holcombs' President (CW18), K-12 school administrators 4 typically are not as sophisticated as higher education administrators, and relied on the agents for a turnkey 5 solution. The agents' "hand-holding" process ensured that the schools received not only the computers, but 6 also the non-Apple hardware and software they required. This end-to-end solution provided by Apple's 7 agents was essential to the schools, according to CW18. Once the agents were fired, there was a backlash 8 by school administrators, an acceleration toward Windows-based PCs, and Apple lost customers. CW18 9 stated that without a doubt Apple's elimination of the agent program accelerated the K-12 market shift to 10 Windows-based PCs. 11 b. The Consequences of Apple's Decision to Fire Its Agents 12 145. According to a former Apple K-12 Education Account Executive (CW19), almost every 13 school in the country received their "budget money" for the new school year in July. Thus, the schools' 14 purchases between July and September and during Apple's 4Q00 (July through September) was the key 15 time for both Apple and its agents. Yet, instead of waiting to dismiss the agents until after the back-to- 16 school purchasing rush, Apple struck early. On April 15, 2000, Apple sent all of its K-12 sales agents 17 letters notifying them that they would be cut off from all Apple sales as of June 30, 2000. 18 146. Once Apple's third-party agents were notified of their termination, they immediately began 19 to cannibalize 4Q00 sales. The president of one of the agent companies (CW21) quickly sought to 20 convince the company's clients to buy as much product as possible before the June 30, 2000 cut-off date, 21 knowing the company would not survive the restructuring. Other agents naturally took the same approach. 22 Indeed, according to data submitted to Apple by Holcombs, although the agent company missed Apple's 23 sales goals throughout 1999 and for the first two quarters of Apple's FY00, it surpassed the goals for the 24 April-June 2000 period by more than 10%. 25 147. Apple's loss of K-12 sales due to cannibalization was further compounded by the 26 incompetence of Apple's in-house sales force and Apple's limited service offering. Apple's new internal 27 sales people were inexperienced and inadequately trained and did not have pre-existing relationships with 28 purchasers in the K-12 education market. Indeed, at an October 18, 2000 conference call with analysts,

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1 defendant Jobs ultimately admitted that during the quarter, "40 percent of our sales representatives 2 were new to Apple and half of our customers had new account managers." Apple sales people also 3 lacked necessary supervision and guidance because Mike Lorion, Apple's Vice President of Education 4 Sales, left in December 1999 and was not replaced. 5 148. According to a former K-12 Account Executive for one of Apple's third-party agents 6 (CW22), the new direct sales regime offered by Apple left out the wide variety of third-party hardware, 7 software and services for configuring and implementing the systems. 8 149. Indeed, the vast majority of agent-represented school customers were not savvy enough 9 (or did not have the incentive) to go to Apple's website, select new computers and software and take 10 delivery of a large number of boxes to be set up when they were delivered by UPS. Rather, the schools 11 had stuck with the Apple platform for so many years primarily because Apple agents were willing to reach 12 out to schools, show up at their doorstep, and help them not only select the right computers, but also get 13 the computers up and running. CW22 stated that the main reason the new program failed was due to the 14 schools' loss of personal relationships and the variety of software and services provided by the agents. 15 150. According to the President of Holcombs, one of Apple's third-party education sales agents 16 (CW18), after the agents were dropped a number of his/her clients notified him/her that they were dropping 17 Apple in favor of PC companies (such as Dell) that offered more personalized service. Additionally, a large 18 number of CW18's client schools and districts cut back or abandoned their Apple purchases after the third- 19 party agents were fired. CW18 noted that while teachers and administrators in the K-12 market still 20 supported Apple, they felt pressure from school districts and parents to use Windows-based computers. 21 According to CW18, the termination of the agent program accelerated the K-12 market shift to Windows- 22 based PCs. 23 151. By way of example, CW18 described one small Catholic school in the Detroit area that 24 typically ordered computers before the summer break. The school depended on Holcombs, one of Apple's 25 third-party agents, to install and configure the systems. When the school was ready to issue a purchase 26 order in July 2000 and was notified that CW18's company was no longer authorized to support its needs, 27 the school immediately switched to Windows-based computers, after years of loyalty to Apple and having 28 built their IT department around Apple products.

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1 152. Other terminated agents resented Apple's attempt to get rid of them. After years of loyalty 2 to Apple and having built their businesses around Apple products, the independent agents let their hard 3 feelings be known to key K-12 education market buyers. Some agents signed contracts with Dell or other 4 Apple competitors to promote their products. 5 153. Thus, at the time Apple stated that the sales agent transition had "progressed nicely," Apple 6 was stuck with a disastrous and irreversible situation: an inexperienced, ill-trained, inadequately supervised 7 and thus ineffective internal sales force that was attempting to learn to sell products in the K-12 education 8 market during the peak and most vital back-to-school selling season. As defendant Jobs ultimately 9 admitted on October 19, 2000 in The Wall Street Journal, after disclosing the disastrous 4Q00 results, 10 "[t]he timing certainly wasn't [smart]."9 Defendants' "timing" cost the company $60 million in lost 11 revenue. It is not, however, the poor business decision about which plaintiffs are complaining, nor is it the 12 terrible treatment given to Apple's long-time educational agents – although this treatment is reprehensible. 13 The point here is that the third-party agents' cannibalization of 4Q00 sales left an empty sales pipeline for 14 the new agents who had no pre-existing relationships to build from and could not provide the total solutions 15 the third-party agents once did. As Jobs put it, the new agents "had to start from scratch," during the 16 height of the back-to-school buying season. Thus, by July 18, 2000, the sales transition had not 17 "progressed nicely," as Oppenheimer stated. In fact, Jobs characterized the decision as a "train wreck." 18 3. Apple's Knowledge that the K-12 Education Sales Force Transition Had Not "Progressed Nicely" as of July 18, 2000 19 a. Jobs' Admissions 20 154. As set forth above by numerous witnesses, Apple's education sales force transition during 21 the heart of the back-to-school buying season drastically impacted education sales in 4Q00. The third- 22 party agents cannibalized 4Q00 sales by front loading as many back-to-school sales and commissions as 23 possible before the end of 3Q00. Apple education customers then abandoned Apple products because 24 Apple could not provide the total solution, including consulting, installation, and software and peripheral 25 help that the third-party agents once provided. Further, Apple's new in-house sales agents were 26

27 9 The October 19, 2000 article in The Wall Street Journal states that "[i]n July 2000, the company transitioned from using a contracted sales force to working with a bigger in-house sales team." As 28 demonstrated by the evidence pleaded below, this "transition" took place prior to that time. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 59 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 64 of 116

1 inexperienced, ill-trained and had very few relationships with the education customers whose accounts they 2 sought. Indeed, according to CEO Jobs, the failure of the transition and its impact on sales for 4Q00 was 3 immediately known as soon as the sales force transition was implemented: 4 The problem was, we were very straightforward and told these third-party salespeople ahead of time that, "Hey, in four months we're going to switch and you're going to be out 5 of a job." Obviously these folks did everything they could to sell as much as they could by June 30, when we let them go, and did absolutely nothing to build for sales in the 6 July quarter. So when our new sales folks got there, they found there was no pipeline work at all; they had to start from scratch. And, duh, this was during the peak 7 buying time for schools. It was just stupid on our part to do this then, and that was my decision. It was a train wreck, and it was totally my fault. 8 155. Jobs' admission, combined with witnesses' testimony, shows that the transition had a 9 catastrophic impact on Apple's educational sales pipeline at the time the new sales force arrived on July 10 1, 2000. Further, Jobs admitted that "40 percent of our sales representatives were new to Apple and 11 half of our customers had new account managers." Even if CEO Jobs, CFO Anderson and Controller 12 Oppenheimer did not immediately recognize the empty pipeline of education sales right away on July 1, 13 2000, by the time Oppenheimer made the "progressed nicely" statement on July 18, 2000, Apple had 14 almost three weeks to execute the transition, analyze the effect on 4Q00 education sales and disclose the 15 negative impact to the public. Instead, Oppenheimer lied while Anderson, the paid keeper of Apple's 16 numbers who is required by Apple's bylaws to know about Apple's financial condition at all times, sat idly 17 on the sidelines. Not until Apple's stock lost 50% of its value did anyone disclose, correct or update 18 Oppenheimer's statement. 19 b. Apple's Knowledge Based on Its Real-Time Education 20 Sales Tracking System 21 156. Apple also knew the sales force transition was not "progressing nicely" because it tracked 22 all educational revenues, commissions and units sold for all geographic regions. According to CW36, 23 Apple's Senior Director of Higher Education during the Class Period who reported directly to Jobs, K-12 24 sales were "going in the toilet" during the Class Period and were eclipsed by higher education sales during 25 July, August and September 2000. CW36 stated that he/she received weekly "Sales Reports" on a 26 spreadsheet attached to an email from the office of Apple's Director of Educational Sales. The Sales 27 Reports included detailed information on actual units sold and revenue per region. CW36 stated that 28

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1 Mandich, Apple's Senior Vice President of Worldwide Sales, was specifically named on the Sales Report 2 distribution list. Mandich reported directly to Jobs. 3 157. Additionally, Apple was well aware of the downturn in K-12 sales, because according to 4 a former Apple Business Analyst during the Class Period (CW25) Apple utilized SAP software which 5 provided Apple with real-time information on actual education sales numbers throughout the Class Period. 6 These up-to-the-minute results were compared with Apple forecasts which were prepared by Mandich 7 and Philip Schiller at any time. CW25 was sure that Mandich forwarded the forecasts to Jobs. Apple's 8 former Senior Director of Higher Education (CW36), who reported directly to Jobs, confirmed CW25's 9 belief and stated that Mandich provided Jobs with all educational sales forecasts. Thus, Jobs could 10 compare education sales forecasts with actual numbers on a weekly basis. CW36 stated he/she believed 11 Jobs received the actual sales numbers from CFO Anderson. Anderson, as Apple's CFO, compiled all 12 forecasts and actual sales numbers and was present at the conference call when Oppenheimer uttered the 13 false "progressed nicely" statement. Oppenheimer, as Apple's Controller, also had the responsibility of 14 compiling and analyzing Apple's sales numbers. 15 158. A former internal Apple K-12 Education Account Executive during the Class Period 16 (CW19) further explained the tracking system for agent sales. Each school represented by an agent had 17 an account number which Apple used to track and report the revenue generated by each school for 18 commission purposes and to compare forecasts to actual sales. Apple generated a commission report on 19 a monthly basis, but could run the report at any time in the interim. Based on the monthly commission 20 reports, CW19 stated that revenues in his/her region were decreasing 10%-12% annually. 21 159. According to a former Apple Regional Sales Manager (CW23), actual sales were also 22 tracked on a web-based sales reporting system. CW23 distributed those sales reports to education sales 23 representatives on a weekly basis and received reports from Apple on a monthly basis. A former Apple 24 Sales Support Specialist for education sales in Canada (CW24), stated that he/she received a weekly email 25 report entitled "Weekly Product Allocation Report" updating the amount of inventory coming in and out 26 to education and reseller accounts. CW24 used this information to estimate customer delivery dates. 27 Based on these reports, CW24 stated that delivery times were behind during the Class Period, indicating 28 that manufacturing was behind. According to CW24, the drop in education sales was obvious, dropping

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1 approximately 20% during the Class Period. CW24 also noted that immediately after 4Q00, there was 2 a significant increase in "back-to-school specials" and incentives for education customers. Such pricing 3 actions indicate an attempt to clear inventory glut. 4 160. According to a sales manager for Holcombs (CW20) and a former President and owner 5 of an Apple third-party agent (CW21), the "Tool" was a database implemented in 1998 to communicate 6 sales history and actual sales between Apple and the third-party agents. The Tool database was contained 7 on a CD-ROM in spreadsheet format. According to CW20, the sales information was reviewed in a 8 monthly meeting between Apple and third-party sales representatives. CW21 also stated that third-party 9 agents kept extremely detailed files with spreadsheets for each salesperson and invoice. 10 161. Further, according to Apple's former Vice President of AppleCare Worldwide Service 11 (CW6), it was "impossible" for CEO Jobs and his entire executive staff not to know about the impact of 12 the K-12 sales force transition because Jobs held a weekly "round table" meeting with members of the 13 executive staff, including CFO Anderson and Senior Vice Presidents Rubinstein, Heinen and Tevanian at 14 which important business areas were discussed. CW6 also confirmed that Apple had systems in place to 15 compare forecasts with actual sales. For example, CW6 noted that Apple generated "errors and misses" 16 reports that detailed variances between forecasted and actual education sales. CW6 believed the system 17 used was SAP. 18 162. Finally, as stated in Apple's bylaws, Anderson's duties as CFO required him to account 19 for each and every transaction and the financial condition of the Company at virtually any time. Thus 20 a strong inference arises that Anderson knew the status of Apple's agent transition and the effect it was 21 having on 4Q00 education sales as soon as the transition was made on June 1, 2000. Even if Anderson 22 and Oppenheimer could not analyze the full impact of the transition on June 1, 2000, they had 23 approximately three weeks to assess and analyze education sales before the "progressed nicely" statement 24 was made. Given (a) Apple's up-to-the-minute tracking of sales using SAP software and weekly emails 25 and reports updating sales, and (b) Jobs' admission that the sales force transition was a "train wreck," 26 resulting in Apple's in-house agents "start[ing] from scratch" with an empty education sales pipeline at 27 the time the in-house agents arrived, a strong inference arises that Anderson and Oppenheimer, as the paid 28

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1 keepers of Apple's numbers, knew that the transition did not "progress nicely" as falsely stated during the 2 July 18, 2000 conference call. 3 4. Apple's Knowledge that Its 4Q00 Financial Projections Had No Reasonable Basis 4 163. As set forth in ¶¶89-122, the problems with Apple's new products were rampant at the 5 time Apple made its 4Q00 forecasts and guided analysts to increase their prior revenue and EPS forecasts. 6 The Cube's problems began with the design defects early in the development stage and continued through 7 Macworld. Instead of ramping up production of the Cube at the time Apple was hyping the product at 8 Macworld and telling the investment community that there would be "a million copies" of the Cube in the 9 marketplace, Apple was trying to reconfigure the inner components of the Cube, redesign the motherboard, 10 fix the cosmetic defects and the power switch, stop the Cube from overheating, and remedy component 11 supply problems. As stated by a former Apple Rework Technician (CW27), the redesigned motherboards 12 were not finished until October 2000 and an effective solution to the Cube's power switch problems was 13 not implemented until November 2000. A former contract Technical Support Representative (CW35) and 14 documents posted by Apple (Exs. D-I) also confirmed that the Cube problems still occurred after 15 November 2000. 16 164. Apple knew about the problems because according to the former Apple Materials 17 Manager for the G4 product line (CW37), Jobs was intricately involved in the development of the G4 18 Cube. CW37 stated that Jobs visited the Cube's development laboratory at a minimum of once per 19 week from May 2000 to Cube release in August 2000 to personally review the Cube's progress of 20 development. The development lab was located on Apple's main campus in Cupertino, California. Indeed, 21 CW37 stated that he/she "frequently" observed Jobs in the lab between May and August 2000. CW37 22 also confirmed that Jobs was heavily involved with the Cube project based upon his/her own observations 23 and based on conversations CW37 had with Trango, Apple's Lead Manufacturing Coordinator who dealt 24 directly with Jobs. CW37 stated that Trango provided Jobs with current updates on the Cube's 25 development. CW37 also stated that Jobs dealt one-on-one with the lead engineer and manufacturing 26 coordinator in the labs. Trango reported to CW37 about conversations Jobs had with lead engineers 27 during the Class Period discussing Apple's inability to produce defect-free cases. Trango reported to 28

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1 CW37 that the Cube was a big part of Jobs' life, and Jobs became extremely upset and vocal about how 2 he wanted the Cube to look and was subject to frequent emotional outbursts. CW37 noted that Jobs' 3 concerns and behavior were a major topic of discussion between Trango and CW37, and that everyone 4 involved in the project was extremely tense because the Cube project was not on schedule. CW37 also 5 stated that he/she received daily status memos and emails regarding Cube development after he/she arrived 6 in May 2000 and that CEO Jobs, Vice President of Hardware Engineering Rubinstein and other 7 executives were copied on the status reports and emails. CW37 also confirmed that the Cube's problems 8 were also tracked on Apple's RADAR bug tracking system. 9 165. According to CW37, from the start of his/her employment in May 2000, the Cube project 10 was missing its development schedules. CW37 stated that after the Cube was released for production, the 11 major cause for the Cube supply shortage was the plastic casing. CW37 also noted that Apple was still 12 making changes to correct the visual imperfections in the Cube casing and the internal component problems 13 after the Cube was released to the public in August 2000, which directly caused the Cube supply shortages. 14 166. According to CW37, Jobs was kept aware of the Cube's supply problems after it was 15 released for production in August 2000. CW37 stated that the material supply for the Cube was so erratic 16 that it required daily material planning meetings involving worldwide participation from Apple's foreign 17 manufacturing sites to coordinate supply. The meetings began after the Cube was released in August 2000. 18 CW37 also stated that daily reports were generated detailing the production quantities and materials 19 shortages and were emailed to Vice President of Worldwide Operations Cook. CW37 also stated that 20 Jobs attended meetings where Cube materials issues were discussed. Based on CW37's position as the 21 Materials Manager for the Cube project, Jobs' active participation with the Cube team leaders, and the 22 discussions CW37 had with Trango, CW37 knew that Vice President of Worldwide Operations Cook was 23 keeping Jobs fully informed on all material supply issues after the Cube was released in August 2000. 24 167. Indeed, according to Apple's former Senior Project Design Manager (CW5), Apple also 25 knew of the severe design and manufacturing problems through monthly Project Status Reports and the 26 Project Risk and Opportunity Reports written by Apple's former Lead Product Designer of the G4 Cube 27 (CW2). According to CW5, defendant Jobs was copied on all Project Status Reports, Project Risk 28 Opportunity Reports and all other critical reports submitted by the Industrial Design teams. CW5

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1 submitted his/her reports to Apple's Vice President of Design and Materials Projects, Evan McCall, who 2 then forwarded them to Rubinstein. Further, CW5 stated that CEO Jobs also attended frequent meetings 3 with the Industrial Design Group's senior staff and was given substantive presentations about the design, 4 engineering and development challenges on all products, including the G4 Cube. CW5 was told by the 5 Cube Lead Product Designer (CW2) and Evan McCall, that several sample Cubes were brought to the 6 Industrial Design campus in Cupertino from the Elk Grove production facility and evaluated with Rubinstein. 7 CW5 stated that based on conversations with CW2 and other members of the Industrial Design Group, 8 CW5 was aware that Jobs was personally shown sample units of the G4 Cube, including ones with 9 cosmetic imperfections, by Rubinstein and perhaps Riccio. CW5 noted that both Rubinstein and Riccio 10 met with Jobs frequently during CW5's employment. 11 168. CW5 recalled a discussion with Cube Lead Product Designer (CW2) in late June or early 12 July 2000 during a lunch break at a project design manager's meeting. During the discussion, CW2 13 disclosed that the G4 Cube project was having problems. One problem discussed was the heat injection 14 process for the plastic Cube casing. CW2 also told CW5 that he/she was "really stressed out" about the 15 Cube problems and was "getting heat from the higher ups" to resolve the problems and "get it right" prior 16 to Macworld. CW5 confirmed that Apple was still dealing with customer complaints about the Cube 17 imperfections when CW5 left Apple in January 2001. 18 169. Also, according to Apple University Campus Representatives (CW7 and CW12), Apple 19 held a "boot camp" in late June 2000 for its college campus sales representatives where the Company 20 introduced all new products, provided technical training, organized seminars and presentations on sales and 21 marketing and facilitated programs with account executives. According to both witnesses, defendant Jobs 22 spoke at the meeting and specifically acknowledged the Cube's production and performance problems. 23 Even though Jobs stated at the June 2000 boot camp that he thought the problems would be solved prior 24 to release, as set forth herein, Jobs knew the problems were not solved before Macworld and became 25 worse in August and September 2000, at the same time he was telling the market otherwise. 26 170. A former contract Technical Support Representative employed by Apple from November 27 2000 to August 2001 (CW35) confirmed that Apple had a "very detailed" internal communications process 28 and stated that he/she received numerous written communications relating to the performance and quality

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1 problems with the G4 Cube and Power Macs during his/her employment. CW35 stated that Jobs was 2 copied on nearly all of these communications. CW35 also stated that the some of the other senior 3 executives were on the distribution lists of the communications regarding problems with the Cube and 4 Power Mac. 5 171. Indeed, that Jobs was copied on daily memos and emails addressing problems with the 6 Cube and visited the development lab one to two times per week is not surprising. Jobs is notorious for 7 his knowledge of all minute details at Apple. According to a May 14, 2001 Fortune article: 8 Jobs still wields inordinate influence over minute details of product development, advertising marketing and occasionally supply-chain issues and manufacturing. He applies 9 his highbrow production values to just about everything an Apple customer sees and touches, from print and TV ads to Macintosh software and hardware. He waxes 10 rhapsodic when describing the "fit and finish" of the new TiBook, pointing out not just the titanium shell but also how Apple built in tiny magnets to hold the keyboard in place. 11 172. When Jobs' notorious micromanagement reputation is combined with numerous witnesses' 12 testimony regarding Jobs' intricate involvement with the G4 Cube's development and production, a strong 13 inference arises that Jobs knew about the Cube's material problems and that Apple could not mass produce 14 and sell 150,000 non-defective Cubes at the time of his Macworld speech. Also, as set forth in ¶¶123- 15 136, 137-139, Apple knew that the new Power Macs were functionally limited until the release of OS X 16 and that the new iMacs "missed the boat" without CD read/write drives making Apple's margin and EPS 17 forecasts unreasonable. Finally, as set forth in ¶¶154-155, supra, Jobs admitted that Apple knew about 18 the disastrous effects of the education sales force transition as soon as it was implemented. 19 173. Given that Apple suffered material problems with all three of its new product lines at the 20 same time it was facing a "train wreck" with a sales segment that accounts for up to one-third of its total 21 sales, a strong inference arises that Apple knew or was deliberately reckless in not knowing that its 22 statements at Macworld were false and Apple's 4Q00 forecasts had no reasonable basis. 23 C. Post-Macworld: Further False and Misleading Statements 24 1. August Statements 25 174. On August 9, 2000, based upon conversations with several of Apple's Senior Officers, 26 PaineWebber issued a report on Apple which forecast 4Q00 and FY00 EPS of $0.46 and $1.85, 27 respectively, for Apple and stated: 28

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1 We are upgrading to Attractive based on the company's great retail (inventory) position [and] new product focus .... Apple's retail inventory management is 2 unprecedented. Apple has managed its retail inventory levels exceptionally ... and maintains less than three weeks of supply, the best among the major retail 3 vendors. 4 175. On August 21, 2000 the San Francisco Chronicle published a favorable article about the 5 G4 Cube. The article was based upon a carefully selected, hand-picked Cube having none of the cracks 6 or cosmetic blemishes plaguing most of the Cubes coming off the assembly lines. Apple was careful to 7 provide such misrepresentative Cubes to technology writers to generate false publicity for the defective 8 product. Apple's cover-up worked: 9 APPLE INGENUITY CUBED 10 * * * 11 Steve Jobs and company continue to put the PC industry to shame .... 12 The latest example is the Power Mac G4 Cube, a new model that began reaching dealers and users last week .... For the last 10 days I've been trying out a unit that 13 Apple loaned me for evaluation. 14 In another couple of weeks, I'll have to give it back, and I'm not looking forward to that day.... [T]he Cube the is one I really wish I could keep.... 15 What it offers above all is a quality all too rarely associated with desktop 16 computers: elegance. 17 That's partly a matter of appearance. Its design [is] a silvery box about 7.7 inches on each dimension, suspended inside a clear plastic stand that holds it a 18 couple of inches off the desk .... 19 2. Late August Statements 20 176. On August 23, 2000, senior officers of Apple, including Apple's CFO, Treasurer, Head 21 of Operations and Head of Desktop Products, met with analysts at Prudential Securities to discuss Apple's 22 business. In addition to telling the Prudential analysts that Apple was operating according to plan and 23 "remains on track to deliver better than expected EPS in its September quarter," they stated: 24 • Both back-to-school and education sales had accelerated as seasonally expected. 25 • New iMac and G4 product offerings had largely filled the channel and the Cube would be hitting the shelves shortly. 26 • Initial orders for the G4 Cube were strong. 27 • Pricing actions had already been booked to clear inventory of older products and 28 additional actions would not be necessary.

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1 • Apple remained comfortable with expectations for 4Q00 revenue and EPS of $2.0- $2.1 billion and $0.44-$0.46. 2 • Apple was forecasting FY01 revenue growth of 20%, yielding EPS of $2.10+. 3 177. On August 23, 2000, Prudential issued a report on Apple by Kimberly Alexy entitled 4 "Business on Track," which was based on and repeated information provided by CFO Anderson and Vice 5 President of Worldwide Operations Cook, among others. The report forecast FY00 and FY01 EPS of 6 $1.84 and $2.10, respectively, and 4Q00 EPS of $0.45 for Apple. It also stated: 7 Yesterday, we met with several members of Apple's senior management 8 team including the company's CFO, Head of Operations, Head of Desktop Products and Treasurer. At the meetings, we discussed general business trends 9 and the outlook for the next 1-2 years. Overall, the tone of the meetings was positive, and management remains comfortable with expectations for >10% Q/Q 10 growth. We are modeling 14% Q/Q to $2.07B and EPS of $0.45 per share. 11 Management noted that both back-to-school and education sales have accelerated as seasonably expected. The company's new iMac (excluding the $799) 12 and G4 products have already hit the distribution shelves while the Cube is just being stocked now and the $799 iMac will hit shelves in September. Pricing actions on older 13 inventory have already been taken (which management estimates negatively impacted Apple's FQ3 margins by 2.3%), and the company does not anticipate needing to take 14 additional actions in FQ4. Apple remains comfortable with its ability to meet demand despite continued component tightness. 15 Apple characterized initial order data on the Cube as strong .... 16 * * * 17 Longer-term, management reiterated guidance for its financial model for FY01 18 which includes: 19 1) Unit growth 25-30% 2) Revenue growth of 20% 20 3) G[ross] M[argins] of 27% 21 * * * 22 Beyond FY01, management continues to expect that the company will be able to deliver revenue growth of approximately 20% .... 23 * * * 24 We believe Apple remains on track to deliver better than expected EPS in its 25 September quarter. Specifically, we believe that revenue guidance is tracking to plan and that G4 guidance will again prove overly conservative. 26 We expect that new product cycles, seasonal demand strength and favorable 27 margin trends will drive >25% operating income growth in FY01. 28

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1 178. On August 30, 2000, Jobs attended the Seybold computer conference and presented the 2 keynote address, which included a report on Apple and the introduction of Apple's new products. During 3 conversations with analysts at the conference, Jobs told analysts: 4 • There had been no change in shipment rates across product lines and component availability. Apple was on its shipment and availability plan. Components 5 availability was tracking according to Company expectations. 6 • Inventory was being effectively managed by Apple. 7 • Consumer acceptance of the Cube was good. Apple was now ramping production from the vicinity of 3,000 units per day to 5,000. 8 • Apple's target was 150,000 Cube units in 4Q00; "tens of thousands" of Cube 9 units had already been sold in 4Q00. 10 • Apple was operating according to plan, and it remained on track to deliver 4Q00 results in line with expectations. 11 179. On August 30, 2000, J.P. Morgan issued a report on Apple by Daniel Kunstler, written 12 after discussions with Jobs and which was based on and repeated information provided to Kunstler by Jobs 13 at the Seybold conference. The report forecast FY00 and FY01 EPS of $1.85 and $2.12, respectively, 14 and 4Q00 EPS of $0.46 for Apple. It also stated: 15 Steve Jobs' speech at Seybold was a little bit of a non event, since 99% of what 16 he had to say had already been said at MacWorld New York on July 19th.... [M]ost of our attention these days is on shipment rates across the product lines, component 17 availability, and the valuation of stock. On the first two points, the big news is that there isn't any. The company is on its shipment and availability plan, and 18 components are as tight and pricey as the company has been expecting. The stock after getting stuck below $50 per share at the end of July and into August has regained the 19 ground lost in the wake of MacWorld New York. That's the good news.... 20 The quarter is probably less of a nail biter than our impression of it as little as a week ago. The reason for any trepidation was simply that Apple had refreshed its entire 21 desktop product line, adjusted pricing and added the Cube. With the new products shipping three weeks into the quarter and an unfilled channel – Apple had, of 22 course, ceased production of older models in anticipation of the new stuff – it looked a little like Apple was walking a tightrope, especially when you add to that 23 component availability worries. But our fears have been calmed: 24 * Customer acceptance of the Cube appears to be quite good.... Apple is now ramping production from the vicinity of 3,000 units per day to 5,000.... Needless to say, it is 25 pleasing to the eye .... 26 [T]he Cube will drive the quarter. Again, shipments are now just ramping, and the new product is just hitting the shelves in Japan. The company target is 150,000 Cube units in 27 the quarter, and Steve talked about "tens of thousands" having been sold already.... 28

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1 * The quality of the desktop product line-up remains very good .... The Cube is not just a great work of aesthetics, but is very powerful .... 2 3. August 25-30: Top Apple Executives Bail Out 3 180. As a result of defendants' extraordinarily bullish statements at the Macworld Conference 4 and during August 2000, Apple's stock gained momentum. By August 25, 2000, Apple stock hit $57-1/2, 5 its highest price since July 18, 2000. On August 31, 2000, Apple's stock hit $61-1/2; on September 1, 6 2000, it hit $63-5/8; and on September 5, 2000, it hit its Class Period high of $64-1/8. Just as Apple's 7 stock was moving to its Class Period high, four of Apple's six Senior Vice Presidents took advantage 8 of the artificial inflation in the price of Apple stock caused by defendants' false and misleading statements, 9 by exercising options to acquire Apple stock at cheap prices and then immediately selling almost 10 $22 million of inflated Apple stock on the open market: 11 % of 12 Shares Actually 13 Owned/ 14 Name Position Date Shares Sold Proceeds Rubinstein Senior Vice President- 8/31/00 100,000 100% $ 5,944,000 15 Hardware Engineering 16 Tamaddon Senior Vice President- 8/31/00 70,000 100% $ 4,214,000 Service and Support 17 Tevanian Senior Vice President- 8/30/00 150,000 100% $ 8,887,500 18 Software Engineering Heinen Senior Vice President- 8/25/00 50,000 100% $ 2,856,500 19 General Counsel 20 TOTAL 370,000 100% $ 21,902,000 SALES 21 The amount and coordination of these stock sales are evidence that the sellers knew of the serious 22 23 undisclosed conditions inside Apple's business before the Company released the negative information to 24 the public. 25 181. Further, during the Class Period, Apple repurchased $25 million of its own stock in an 26 effort to boost the value of its executive stock options, share price and EPS in the short term. As set forth 27 in the Steinholt Decl., numerous economic experts agree that companies use stock buyback programs to 28 boost stock prices and the value of executive stock options in the short term by reducing the number of

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1 shares outstanding. This allows companies to report increased EPS results even if total earnings do not 2 increase at all. Thus, Apple used the $25 million in Apple shares to boost its stock price, EPS and value 3 of executive options, knowing that its core products and back-to-school sales were not going to support 4 its 4Q00 forecasts. 5 D. Reasons Why Apple's August 2000 Statements Were False and Misleading and Apple Knew It 6 1. Statement that "Both Back-to-School and Education Sales Have 7 Accelerated as Seasonally Expected" 8 182. As set forth in ¶¶140-162, Apple's decision to fire its third-party sales agents was a 9 complete failure resulting in a $60 million education sales shortfall in 4Q00. CEO Jobs called the decision 10 "stupid," the timing "poor," resulting in a "train wreck" right during the heart of the back-to-school buying 11 season. Jobs also admitted that when Apple's new in-house sales force arrived at the beginning of 4Q00, 12 there was no K-12 education sales pipeline because Apple's third-party agents cannibalized 4Q00 sales. 13 Thus, the new in-house sales force had to "start from scratch." Further, as alleged in ¶¶156-162, Jobs held 14 weekly round-table discussions with top executives and Apple tracked education sales in real time using 15 SAP software, thus knowing that sales had not "accelerated" as Apple represented. Apple had almost two 16 months to analyze the repercussions of the sales force transition and track variances between forecasts 17 and actual sales. Given these facts, Apple's statement of historical fact was false and misleading when 18 made, and Apple knew it. 19 2. Statements that Apple Was "Comfortable" and "On Track" to Deliver $2.0+ Billion and $0.45 EPS 20 183. As set forth in ¶¶89-122, 163-173, by the time Apple said it was "comfortable" and "on 21 track" to meet 4Q00 revenue and EPS projections, Apple had direct knowledge that the G4 Cube was 22 plagued with design and production problems, including cracks in the purportedly "crystal clear" casing, 23 overheating due to poor chip placement and motherboard configuration and shortages in Cube casings and 24 redesigned motherboards. The design, production and supply problems were further compounded by the 25 defects in the Cube's power switch, which manifested itself upon shipment. 26 184. As set forth in ¶¶123-139, Apple was also aware of the lack of Power Mac and iMac 27 sales due to the performance defects and lack of features, respectively. These problems did not go away 28

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1 by the time Apple stated it was "comfortable" and "on track" to meet 4Q00 projections. In fact, the 2 problems only intensified. As set forth in ¶¶106-122, Apple knew that it still could not fix the cosmetic 3 problems with the Cube's case, nor could it remedy the power switch sensor defects, which were 4 aggravated by the heat generated by the Cube's compact design. Further, as set forth in ¶¶95-97, 103- 5 105, 113, 165, Apple knew that a shortage of plastic cases and motherboards made it impossible for 6 Apple to ramp up sufficiently to sell enough Cubes to make its 4Q00 numbers. 7 185. As set forth in ¶¶163-173 by numerous witnesses, CEO Jobs knew every problematic 8 detail plaguing the Cube both prior to and after release, through one-on-one conversations and updates 9 with Cube team leaders about problems, including cosmetic defects, first-hand looks at the Cube during 10 presentations, weekly visits to the Cube design lab and daily and weekly reports documenting the 11 development and supply progress (or lack thereof) of the Cube. Also, Jobs held weekly roundtable 12 discussions with his top officers, including CFO Anderson and hardware chief Rubinstein. ¶161. Apple's 13 knowledge is also shown by six separate documents posted on Apple's website specifically citing the 14 defects with the Cube and Power Mac, three of which were posted during the Class Period. Exs. D-I. 15 For example, a document posted on August 15, 2000 explains the surface "mold line" problem on the 16 Cube's casing and even tries to dispute that they are "cracks." Ex. D. Another document dated September 17 1, 2000, acknowledges the Cube's power switch defect caused during shipping. Ex. E. Three other 18 documents posted after the Class Period (one of which was only three days after the Class Period) 19 explained the defects with the Cube's casing and power switch and provided instructions on how to 20 replace the casing and add extra parts to the power switch mechanism. Exs. F-H. Another document 21 created on July 21, 2000, only three days after Macworld, admitted that applications "not optimized" for 22 dual processors would function the same as with a single processor Power Mac. Ex. I. The six documents 23 posted on Apple's website during and after the Class Period confirm that Apple knew about, yet tried to 24 minimize and continue to conceal the Cube and Power Mac defects while they were occurring. At the 25 same time, Apple never once disclosed the prevalence of such problems or the impact they undoubtedly 26 would have (and did have) on both Apple's ability to sell Cubes and Power Macs during the Class Period 27 and the reasonableness of Apple's 4Q00 forecasts. 28

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1 186. Finally, Apple's knowledge of the Cube and Power Mac defects is shown by two memos 2 sent by Rubinstein's office. First, the early August 2000 Product Defect memo, which acknowledged the 3 Cube and Power Mac defects, alerted front line personnel to "expect" a large number of complaints and 4 even provided instructions to address various defects in the products. ¶¶111-112. The existence of the 5 Product Defect memo was corroborated by a former Apple Frontline Technical Support Representative 6 (CW9) and a former AppleCare Representative (CW38). In addition, Apple's knowledge is shown by 7 the early August 2000 Call to Arms memo from Rubinstein's office, which was sent to all production 8 supervisors and engineers, including a Senior Production Supervisor (CW1), and directed personnel to 9 ramp up production of the Cube, despite known defects. ¶113. Thus, given the existence of numerous 10 documents acknowledging the product problems and the numerous witness accounts of Jobs' personal 11 participation in Cube development and supply issues, a strong inference arises that Apple actually knew 12 that it would not deliver its 4Q00 financial projections. 13 187. In addition, as set forth in ¶¶140-155, the sales transition "train wreck" was in full swing 14 by the time Apple made its August statements. Thus, given that Apple knew about (a) severe product 15 defects plaguing the products Apple specifically stated would drive growth, and (b) the failure of its K-12 16 sales force transition as early as July 2000, Apple knew there was no reasonable basis for it to state that 17 it was "comfortable" and "on track" to make its 4Q00 projections. 18 3. Statements that Inventory Was Being Effectively Managed and "Pricing Actions on Older Inventory Have Already Been Taken 19 and the Company Does Not Anticipate Needing to Take Additional Action in FQ4" 20 188. A key part of Apple's "turnaround" was improving its operating efficiencies, lowering its 21 costs and, most importantly, reducing its inventories of finished goods and component parts. By mid-2000, 22 Apple purported to have the most effective component part and finished goods inventory control system 23 of any personal computer manufacturer, greatly increasing Apple's profitability. A July 31, 2000 Business 24 Week article details these changes: 25 The most striking change has been in operations. When Jobs took over, Apple ended 26 each quarter with some 70 days' worth of finished products sloshing around its factories and warehouses, a $500 million-plus drag on profits that was the worst 27 in the industry. Jobs quickly streamlined. He outsourced manufacturing of half of Apple's products to contractors who could do it far more efficiently, say analysts. That got 28 inventory down to about a month by early 1998. Jobs still wasn't satisfied. He hired

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1 former Compaq procurement executive Timothy D. Cook to meet a higher goal: to get more efficient than Dell, the industry's best. 2 * * * 3 But Cook's biggest claim to fame is getting the inventory of parts down to 4 less than a day – obliterating the record in an industry where weeks or even months is the norm. One reason: Apple has persuaded key suppliers to set up 5 shop close to Apple facilities, for just-in-time delivery. Another benefit of the new system: The entire production process has dropped from almost four months to 6 just two, so Apple can more quickly move to the latest, fastest parts. 7 189. As a result of its purported restructuring, Apple represented that it was now much better 8 able to control and manage its finished goods and component parts inventories, manufacturing and sales. 9 As a result, Apple represented that its restructuring had caused a substantial turnaround, resulting in a 25% 10 rise in Macintosh unit sales during 1999 – primarily attributable to the success of the iMac. The Company 11 pointed to sales of approximately 1.8 million iMac units in 1999 (an increase of approximately 730,000 12 units, or 68% over unit sales of similar products in 1998) as well as a significant quantity of Power Mac 13 computers introduced in August 1999, as evidence that the restructuring had been successfully completed 14 by 3Q00. 15 190. The slowdown in sales of Apple products created a crisis inside Apple as early as July 16 2000, as Apple's channel inventories began to balloon due to the slower than expected retail sell-through 17 of Cubes, iMacs and Power Macs. At the same time, on-hand inventory levels of these products also 18 increased. As a result, Apple's top executives knew that Apple was accumulating millions of 19 dollars in excessive inventories. This problem was exacerbated by the fact that Apple still had in its 20 distribution channel older model iMacs and Power Macs which were not selling well. This meant that 21 Apple would have to take severe pricing action during 4Q00 to remove inventory out of its distribution 22 channel and would also have to curtail shipments into the distribution channel, all of which had a terribly 23 negative impact on Apple's 4Q00 revenues and EPS. 24 191. The high level of Apple's finished goods inventories created another very serious problem 25 for Apple, which its top executives were immediately aware of. Earlier in FY00, in an effort to assure itself 26 of a sufficient quantity of component parts to manufacture its new products in quantity, Apple had entered 27 into unusual purchase agreements with component parts suppliers which provided that Apple would have 28 to pay substantial financial penalties if it cancelled component parts orders. Normally, a company

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1 of Apple's size is such a desirable customer that it can obtain component parts without exposing itself to 2 the risk of financial penalties upon cancellation. However, during the time period when Apple was 3 attempting to secure commitments to supply it with unique component parts such as G4 Cube casings, 4 demand for personal computers was so strong that component parts manufacturers were able to force 5 Apple to agree to unusual penalty terms. Thus, the slow sale of Apple's new products created a double- 6 whammy. In addition to depriving Apple of revenue needed to meet its revenue and EPS forecasts and 7 causing its finished goods inventories to balloon, Apple was now faced with the prospect of being 8 overwhelmed by a tsunami of unneeded component parts which would, of course, further exacerbate its 9 already seriously deteriorating inventory position. Therefore, Apple began as early as August 2000 to 10 cancel component parts orders even though Apple's top executives knew this would result in Apple 11 incurring substantial financial penalties which would very adversely affect its 4Q00 and its 1Q01 results. 12 Indeed, according to the Materials Manager for the G4 line, CW37, inventory grew to 1.5 times the normal 13 four to six week supply between 3Q00 and 4Q00. Apple disclosed none of this to the public and ended 14 4Q00 with three to five extra weeks of inventory contributing to an approximate 2.0% gross margin miss. 15 192. Further, as set forth in ¶¶123-136, at the same time Apple was facing problems supplying 16 and fixing the G4 Cube, consumers were not buying Power Macs because of their speed and operability 17 problems. Thus, customers rejected the new Power Macs and continued to purchase the older version 18 Power Macs which were much less expensive. This shift cost Apple millions as inventories of is new 19 Power Macs ballooned. ¶218. Compounding the problem was Apple's failure to equip its new iMacs with 20 CD read/write drives and 17-inch monitors that customers demanded, as set forth in ¶¶137-139. Indeed, 21 Apple later attributed $30 million of the $180 million 4Q00 revenue shortfall to a mix-shift to lower-priced, 22 lower-margin single processor Power Macs and also took pricing action and charges to clear inventory of 23 Power Macs and iMacs, all of which contributed to Apple's gross margin miss of approximately 2.0%. 24 ¶218. Apple also admitted that it was stuck with three to five extra weeks of channel inventory to deal with 25 at the end of 4Q00. None of this was disclosed to the public until the stock collapsed. 26 193. The extent of Apple's problems related to pricing action and clearing of inventory in 4Q00 27 is further reinforced by the severe charges taken in 1Q01. Apple suffered negative margins and a huge 28 $420 million operating loss for 1Q01 and EPS of negative $0.73. These charges confirm that Apple was

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1 having inventory and component parts problems during the Class Period that were not disclosed. As 2 Fortune reported on May 14, 2001, "[Apple] had to pay huge penalty fees for cancellation of key 3 components that it had preordered when it forecast much higher reduction levels. Also, Apple 4 had to pay rebates and otherwise help its distributors and retailers clear out what had become 5 an 11-week inventory glut to make way for the new products. All that cost big bucks." ¶225. 6 Again, none of the inventory problems were disclosed until Apple announced its shocking EPS and revenue 7 miss. Given that Apple utilized SAP, and was extremely sensitive to fluctuations in inventory volume, a 8 strong inference arises that Apple knew of its inventory problems when it said no further pricing action 9 would be taken. 10 4. Statement that Apple Was "On Its Shipment and Availability Plan" 11 194. As set forth in ¶¶95-97, 103-105, 165, the shortage of Cube cases and redesigned 12 motherboards further delayed a product which was already late to market because Apple engineers and 13 designers were still trying to fix the defects with the power switch, the overheating and the flawed casing. 14 As set forth in ¶98, numerous confidential witnesses stated that the Cube was delayed by approximately 15 six months and missed its development schedules. Further, numerous confidential witnesses stated that the 16 defects were not fixed until after 4Q00. ¶¶96, 118-120. Indeed, analyst checks on retail shelves in early 17 September 2000 showed that Cubes would not generally be available until mid-September 2000. ¶197. 18 195. Apple was well aware of all of these facts. As set forth in ¶¶163-173, CEO Jobs was 19 heavily involved with every minute detail of Cube development and production from start to finish. Further, 20 CEO Jobs and Senior Vice President of Worldwide Operations Cook were both aware of materials 21 shortage issues through the reports and meetings described by Apple's former Materials Manager for the 22 G4 line (CW37). ¶166. Rubinstein's August 2000 Call to Arms memo directing employees to ramp up 23 production also confirms that Apple's shipments and availability were not "on plan" as Apple falsely stated. 24 ¶113. Thus, Cubes were not readily available to customers in August as Apple first represented at 25 Macworld and later to analysts. Once the Cubes were available, many had to be returned or repaired due 26 to cracks in the cases, overheating problems and defects with the power switch which were not fixed until 27 28

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1 well after the Class Period, if at all. Due to the major supply and production problems, Apple knew that 2 the statement that it was "on its shipment and availability plan" was false when made. 3 5. Statements that Cube Orders Were "Strong," Customer Acceptance Was "Good," the Cube Would "Drive the Quarter" 4 and Apple Had Sold "Tens of Thousands" of Cubes 5 196. Based on the facts set forth in ¶¶89-122 and 163-173, at the time Apple stated it had 6 already sold "tens of thousands" of Cubes, the Cube would "drive the quarter" and customer acceptance 7 was "good," Apple failed to disclose that it was facing massive component supply problems and design and 8 production defects which caused critical delays and customer returns and repairs. Even if Apple had 9 technically shipped "tens of thousands" of Cubes, Jobs failed to state that many of those Cubes were 10 defective and commercially unacceptable and would be returned or repaired. Jobs also failed to disclose 11 that the Cube's public release was materially delayed due to motherboard and plastic casing shortages and 12 production and engineering problems. ¶¶95-97, 103-105, 165-166. Documents on Apple's website and 13 the early August 2000 Product Defect memo confirmed the problems. ¶¶111-112; Exs. D-H. Finally, 14 Jobs painted a false picture of the success of the G4 Cube even though he knew Apple could not 15 manufacture enough non-defective "pristine" Cubes to meet its target of 150,000 in 4Q00. As set forth in 16 ¶¶164 and 166, Jobs was personally kept appraised of Cube progress both during development and after 17 release and knew that his positive spin on the Cube was far from the truth. 18 E. September Statements 19 197. On September 6, 2000, Prudential issued a report on Apple by Kimberly Alexy, written 20 after discussions with Apple officials, which was based on and repeated information they provided. The 21 report stated: 22 • Apple's new product offerings appear to have taken somewhat longer than initially expected to reach the channel. However, August sales checks suggested new 23 iMac and G4 offerings reached the shelves by mid-month while Cube products are still in transit. 24 • Apple remains comfortable with consensus FQ4 revenues expectations for 25 $2.05B in revenues. Back-to-school demand appears to have accelerated as expected .... 26 * * * 27 Retailers surveyed noted that the Cube is generally not available yet but is expected to 28 be on the shelves in early to mid-September.

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1 198. The Prudential report was the first indication that Apple's new products were delayed in 2 reaching retailers' shelves in full quantities. Of course, Apple never once mentioned it. Apple's stock fell 3 to as low as $57-3/4 on September 6, 2000 from $64-1/8 on September 5, 2000. The stock continued 4 to trade at inflated levels, however, based on Apple's false assurances to analysts that Apple "remained 5 comfortable" with consensus 4Q00 revenue expectations and that its back-to-school demand "accelerated 6 as expected." 7 199. On September 8, 2000, Merrill Lynch issued a report on Apple by Steven Fortuna, written 8 after discussions with Apple officials, which was based on and repeated information they provided. The 9 report continued to forecast Apple's FY00 and FY01 EPS of $1.84 and $2.08, respectively, and 4Q00 10 EPS of $0.45. It also stated: 11 Apple Q4 Tracking On Plan 12 • We believe that Apple's September quarter (4Q00) is tracking on plan. We are expecting revenue of $2.015 billion (up 50.8% yr/yr), and earnings per share 13 of $0.45. 14 1. September 13, 2000: Jobs' Statements in Paris and During CNBC Interview 15 200. On September 13, 2000, Jobs appeared at the Paris computer trade show where he again 16 extolled Apple's new products, their beneficial effect on Apple's 4Q00 revenues and EPS and their overall 17 availability. Jobs said Apple's new products gave it "the strongest product line that Apple has ever 18 had." Jobs also said he was "extremely happy" with sales of the G4 Cube, but, not surprisingly, declined 19 to reveal actual shipment/sales figures. Jobs' remarks were reported in the National Post and USA 20 Today. 21 201. On September 13, 2000, Jobs also appeared on the financial news channel CNBC – 22 watched by millions of viewers. During this interview, when asked about rumored shortages of the 23 Company's G4 Cube, Jobs stated that Apple had already shipped "many tens of thousands" of 24 Cubes and concluded the interview by stating: "I think we're going to hit our forecasts this quarter, 25 so if they're hard to find, I think that's because demand is greater than we thought it would be 26 ...." Two weeks later, Apple admitted to a "slower than expected start" in Cube sales to the tune of $90 27 million. 28

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1 202. Thus, as late as two weeks before the end of the Class Period, Apple presented a picture 2 to the investment community that concealed the true reasons why the Cube was not available and 3 misrepresented the success of its Power Mac and iMac lines. In short, Apple "guided" the investment 4 community to conclude that its business had never been stronger, its outlook had never been brighter and 5 its 4Q00 would be exceptionally strong – over $2.0+ billion, with EPS of $0.40+ to be followed by 20% 6 revenue growth and 15% EPS growth in FY01. 7 2. September 21, 2000: Questions Start 8 203. On September 21, 2000, The Wall Street Journal carried an article about Apple hinting 9 that there were quality problems with Apple's G4 Cube and that Jobs knew it: 10 Earlier this week, Kevin Pedraja, a public-relations executive ... was startled to receive an early-morning call from [Steve Jobs] the mercurial Apple founder. Mr. Pedraja recently 11 had purchased one of Apple's stylish new Power Mac G4 Cube computers, but found some cracks in it and got no help when he called ... to complain. 12 Mr. Pedraja finally faxed a strong letter to Mr. Jobs that also threatened 13 to spill the beans to the media. The letter yielded immediate results. Apple's executive- relations team promptly offered to replace Mr. Pedraja's Cube with a new one. 14 204. Also on September 21, 2000, analysts at Morgan Stanley issued a report stating that 15 feedback they had obtained was "inconclusive" as to whether or not Apple had its new product transition 16 "in the bag," and indicating that remaining inventories of the older Power Mac line were impacting 17 sales of the new Power Mac line. Despite these concerns, however, Apple's previous positive guidance 18 caused Morgan Stanley to conclude, "we do not believe Apple will miss our EPS estimate of $.45." 19 As a result of the unsettling revelation, Apple's stock fell in sympathy from $61-3/64 on September 20, 20 2000 to as low as $50 on September 22, 2000 before closing at $52-3/16. Apple's stock continued to 21 trade at inflated levels, however, based on Apple's false assurances to analysts that it was on track to meet 22 its 4Q00 forecasted results, its failure to correct or update previously made false statements, and its 23 continuing concealment of material adverse facts. 24 3. September 28, 2000: Morning – All Is Rosy 25 205. On September 28, 2000, The Wall Street Journal ran an article on Apple and its G4 26 Cube, based on a carefully hand-picked and hand polished cosmetically perfect G4 Cube that was loaned 27 to Walter Mossberg, a technology writer for the Journal. Mossberg's piece stated: 28

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1 Apple's Design Delight: The Cube Is Beautiful, Silent and Powerful 2 * * * 3 APPLE HAS DONE it again. The company that has long stood for style and innovation in a sea of industrial, me-too computers has now introduced a top-of-the-line, 4 powerful machine that is simply the most gorgeous personal computer I've ever seen or used. And I've seen most of them. 5 The new Power Mac G4 Cube packs a fast Macintosh into a beautiful, silvery 6 case that's just 7.7 inches on a side and 9.8 inches tall. It weighs just 14 pounds, not much more than some bulky laptops. And it looks like a museum piece .... 7 * * * 8 SO THE CUBE isn't for value buyers. You are definitely paying more for a design 9 with style and elegance. But that design delights. 10 * * * 11 What the Cube proves is that great design isn't inconsistent with strong technology. 12 F. Reasons Why Apple's September Statements Were False and 13 Misleading and Apple Knew It 14 1. Jobs' Statements that He Was "Extremely Happy" with Sales of the G4 Cube; that the New Products Gave Apple "the Strongest 15 Product Line Apple Has Ever Had;" and that a Rumored Cube Shortage Was Because "Demand Was Greater than We 16 Thought It Would Be" 17 206. As set forth in ¶¶163-173, Jobs and Apple knew that the G4 Cube was plagued with 18 design and production defects that would not be solved until after the Class Period. Jobs and Apple also 19 knew that the material defects caused a major supply shortage of components for the Cube and delayed 20 shipments. ¶¶95-97, 103-105, 164-166. Further, as set forth in ¶¶164-167, defendant Jobs was 21 intricately involved with the development of the G4 Cube, spent time in the lab with Cube engineers 22 discussing the material defects and was copied on nearly all communications regarding the G4 Cube 23 problems. Further, as set forth in ¶¶111-112; Exs. D-G, Apple acknowledged the problems in documents 24 and memos. Thus, Jobs statements in mid-September that he was "extremely happy" with sales of the 25 Cube, that Apple's new products gave it "the strongest product line that Apple has ever had," and that the 26 reason the Cube was hard to find was because "demand was greater than we thought it would be," were 27 materially misleading and blatantly covered up the design and supply problems Apple knew about all along. 28 Indeed, only 15 days later, Apple admitted that Cube sales missed by what would later amount to $90

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1 million, as a result of a "slower than expected start" in G4 Cube sales due to power switch problems, 2 pricing and cosmetic issues. The proximity and stark contrast between Jobs' statements and the true status 3 of Cube sales, combined with numerous witness accounts of Jobs' intricate involvement with the Cube, 4 gives rise to a strong inference of Jobs' scienter. 5 2. Apple's Statements that: (a) It "Remains Comfortable with Consensus FQ4 Revenues Expectations" (September 6, 2000); 6 (b) Back-to-School Demand Has "Accelerated as Expected" (September 6, 2000); (c) Apple's 4Q00 Was "Tracking on Plan" 7 (September 8, 2000); and (d) Apple Would "Hit" Its 4Q00 Forecasts (September 13, 2000) 8 207. Apple's false statements made on September 6, 2000 and September 8, 2000 were all 9 nearly identical to its false statements made in late August 2000. ¶¶182-187. Thus, they were knowingly 10 false when made for the same reasons (albeit with a stronger inference of scienter due to the closer 11 proximity between the statements and the September 28, 2000 bad news). Additionally, Jobs' statement 12 that he thought Apple would "hit" its 4Q00 forecasts was also without reasonable basis. As set forth in 13 ¶¶89-173, the problems with the G4 Cube, the Power Mac, falling demand for iMacs, bloated inventory 14 and the disastrous education sales transition made "hitting" Apple's forecasts impossible, especially given 15 only 17 days left in 4Q00. Indeed, only 15 days after Jobs' comments, Apple abruptly announced a 25% 16 EPS miss, which was later attributed to a $180 million revenue shortfall and an approximate 2.0% drop 17 in gross margins. Given the close proximity between Jobs' glowing statements and Apple's shocking 18 revelation, it is evident that Jobs did not have a reasonable basis for the statements at the time he made 19 them. 20 VII. ADVERSE FACTS BEGIN TO COME OUT 21 208. After the close of trading on September 28, 2000, Apple revealed that its 4Q00 revenue 22 and EPS would be much worse than previous guidance – revenues of only $1.85-$1.9 billion and EPS of 23 just $0.30 – a huge shortfall from the previously forecast EPS of $0.40+ on revenue exceeding $2 billion. 24 According to the Company's statement, 4Q00 results would be "substantially below expectations" 25 due to slower than expected sales across all geographies, a "slower than expected start" in the 26 sale of the G4 Cube and slower than expected sales into the K-12 education market. In other 27 28

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1 words, 4Q00 results were the exact opposite of what Apple was telling the public throughout the Class 2 Period and as late as two weeks earlier. 3 209. The market's reaction to Apple's shocking revelation was immediate. Apple stock 4 collapsed by over 50% from $53-1/2 on September 28, 2000 to just $25-3/8 on September 29, 2000 5 on astonishing volume of 129.8 million shares. This was the largest one-day price decline on the 6 largest one-day trading volume in Apple's history as a public company. As the market digested 7 the full gravity of Apple's business and product problems, and that Apple would shortly cut back 8 its forecasts for FY01 as well, Apple stock continued to plunge, falling to as low as $17 and then 9 to $13-5/8. Over $10 billion of Apple's market value had been wiped out. 10 210. Apple has now revealed that it was unable to get its inventories under control, would suffer 11 $115 million in component parts cancellation charges, and $135 million in promotional costs to try to clean 12 out its inventory. Apple's 1Q01 and FY01 revenues showed huge declines, suffering a $250 million loss 13 in 1Q01 and a loss for FY01. 14 211. Apple's surprise revelation, which wiped out over half of Apple's market capitalization in 15 one day, created an outburst of criticism and anger from analysts and investors, as reflected in media 16 reports of the debacle: 17 • "Apple's bombshell ...." – The Independent, September 30, 2000. 18 • "Apple's comeback is over." – Don Young, an analyst at PaineWebber, October 6, 2000 Irish Times. 19 • "Half an Apple, anyone? That's not even quite what somebody who owned the stock 20 Thursday night ended up with at Friday's close .... If it's any consolation to those sadder and poorer souls, not all Apple shareholders were blindsided. Several 21 officers, we're happy to report, exercised options in late August and immediately unloaded the stock at prices ranging up to $60 a share. Altogether, they pocketed 22 a cool $19 million." – Barron's, October 2, 2000. 23 • "Thursday's after hours warning sent Apple almost back to square one ... [and] delivered a sharp blow to Apple's revival under Mr. Jobs.... Charlie Wolf, an analyst 24 at UBS Warburg, said: 'This raises a red flag for the future.'" – Reuter's, September 30, 2000. 25 • This reaction "borders on brutality, but we must stop short of dubbing it an over- 26 reaction given the amplitude of the shortfall, overall slowing of the company's growth plans for the next fiscal year, and the absence of any explanation beyond a lack of 27 customers." – Daniel Kunstler, an analyst at J.P. Morgan, September 29, 2000. 28

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1 • "Most analysts appeared to be taken by surprise by the Apple statement .... Apple has recently been basking in glowing reviews of its sleek new Power Mac G4 Cube 2 computer, and has increasingly come to be recognized for its fiscal discipline. Several quarters of consistently strong results had finally started to erase the memory of the 3 execution problems it had had years ago. As recently as last week, many analysts had reiterated their confidence in the company and said they saw strong demand for 4 a slew of new products ...." – Los Angeles Times, September 29, 2000. 5 • "Tim Bajarin, president of consulting firm Creative Strategies Inc., Campbell, Calif., said the loss came as a surprise. 'We're not seeing any slowdown in demand across any 6 other sector in the PC industry .... Most other PC players are expecting their fourth quarters to be strong.'" – The Wall Street Journal, September 29, 2000. 7 • "Apple['s] earnings warning appears to signal the company has more than just one 8 quarter worth of problems.... [A]nalysts said Thursday's fiscal fourth-quarter warning, which sent Apple shares plummeting, may be evidence the company has saturated its loyal 9 user base with products over the last few years and may have trouble attracting new users to its Macintosh platform. 'We think in many ways that Apple has milked its 10 installed base dry over the past few years, particularly in the education and publishing markets, but also to a large degree, in the consumer market,' wrote 11 Merrill Lynch & Co. Steven Fortuna in a research note." – Dow Jones News Service, September 29, 2000. 12 212. On October 2, 2000, SmartMoney.com ran an article on the Dow Jones News Service 13 headlined "Apple Computer Gets Halved," which stated: 14 [The September 28, 2000 revelations were] a bitter come down from the wave of iMac 15 euphoria that had boosted Apple stock .... $9 billion in market value evaporated in one day. 16 The problem is broad and deep.... 17 * * * 18 The latest refresh of Apple's iMac has been disappointing, says Stephen Baker, 19 vice president of technology products research for PC Data. 20 Sure, there were new colors offered ... [b]ut the machines were still being shipped with 15-inch monitors when comparable Wintel PCs from Dell computer 21 and Compaq Computer feature the 17-inch variety. Baker was also surprised when Apple didn't include a CD-RW drive, a popular feature that allows the 22 computer to write data (read: MP3 files) to CD-ROMs. 23 * * * 24 As for the G4 ... early sales data seem to indicate that it may be priced too high. The Cube sells for $1,799 to $2,799, depending on its features – and that's 25 without a monitor.... 26 And a comparably priced PC invariably comes with much more memory and hard-disk space. 27 213. In early October 2000, Business Week also reported: 28

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1 [T]he magic Jobs had spread over Wall Street evaporated, as investors ruthlessly drove the stock down 52% .... Why so vicious a reaction?... There's ... growing concern 2 that the Jobs formula for recapturing lost market share – pump up the profits by selling sexy-looking, premium-priced products to a core market of Apple freaks – was 3 little more than a short-term fix. 4 * * * 5 Apple's 2000 crop of products is little more than eye candy. Sure, the Power Mac G4 Cube ... looks great. But consumers recoiled at the $2,300 base price that 6 Jobs figured they would pay.... The ... units sold are only about half what Apple insiders had expected, say analysts. And it's not likely the Cube will be a late 7 bloomer. Net message boards are filled with customer complaints about such things as mold lines in the plastic casing. 8 More important, Jobs needs to avoid the hubris that has stopped Apple's gold eras 9 in the past. That means lowering the price of the Cube – and improving the iMac. It now lacks basic features many shoppers want, such as a rewritable CD- drive for 10 creating custom song compilations or storing home movies and larger 17-inch monitors. Rather than invest to make these changes, Jobs opted to add new colors and 11 cut prices. It didn't work ... iMac sales in the U.S. dropped 30% in the most recent quarter. 12 214. In early October 2000, Barron's also published an article entitled "Apple's Troubles Lie 13 at It's Core," which exposed the fiasco in Apple's K-12 education market. The article stated: 14 The educational market has long been dominated by Apple .... Now, however, 15 there is evidence that Apple's commanding share of the education market is starting to erode. 16 * * * 17 Last June, Apple quietly decided to fire some 50 educational resellers and 18 shift distribution to a company-run, direct-order Website.... It would have been far wiser for the company's impatient chief executive, Steve Jobs, to have waited 19 until after the critical summer and fall quarters before announcing the transition. Here's why: Jilted resellers appear to have stopped pitching Apple, working 20 instead to solidify their administrative contacts at the schools in hopes of saving their businesses. The result: a lousy quarter. 21 For a decade or so, the educational reseller program had been a winner for 22 Apple.... The brokers would sell the machines and servers, and Apple would ship direct from its warehouses .... The arrangement worked well. 23 * * * 24 "I would never had made that move during the school buying season," an 25 industry source said. 26 * * * 27 That Apple salesmen stopped knocking at a time when school districts are pouring dollars into computer hardware is a misstep that could inflict permanent damage. 28

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1 * * * 2 Apple's stumble in the school segment is coming against the backdrop of an expanding market for educational sales – not a market slowdown. Competitors are taking a bite 3 out of one of Apple's core businesses, and new avenues of future growth remain unclear. The threat to Apple's impressive turnaround is elementary. 4 215. In mid-October 2000, The Wall Street Journal also published an article about the 5 breakdown in Apple's education market headlined, "Dwindling Education Sales Take a Bite Out of Apple's 6 Bottom Line." The article stated: 7 To understand why Apple ... warned that its quarterly earnings ... will disappoint 8 investors, listen to Brad Lichtman. 9 Mr. Lichtman, principal of Grossmont High School in El Cajon, Calif., considers himself an Apple fan.... 10 But when Mr. Lichtman authorized the purchase of 40 new computers over the 11 summer, the bulk of the order went to Apple rival Dell Computer Corp. "Ten years ago, most teachers used Macs, but now that's definitely changing," says Mr. Lichtman.... 12 Many schools and universities – the mainstays of Apple's customer base for 13 years – are phasing out their Macs in favor of personal computers based on the rival Windows operating system. The trend has accelerated over the past 12 14 months.... 15 This past July, Baltimore County Public Schools in Baltimore switched from Apple to the Windows platform.... "We've got to prepare students for the workplace, and most 16 companies and the private sector now use Windows, not Macs," [said the Superintendent]. 17 The shift is hurting Apple's bottom line. Education accounted for 40% of Apple's total U.S. sales over the past few quarters.... 18 * * * 19 When the big push to wire classrooms began more than a decade ago, Apple jumped on 20 the market and Macs became educators' top choice because of their ease of use and friendly graphical interface. The company deluged the market with special marketing 21 programs, often at a discount, and created a widespread network of education sales agents. 22 * * * 23 Since the start of the year, Apple's education sales team has also 24 undergone confusing changes, many schools complain. Mike Lorion, an Apple executive overseeing education sales, left the company .... After his departure, Apple 25 eliminated its contracted education sales force and brought the team in-house.... 26 The upshot: Apple now has far less direct contact with schools than it used to.... And that has left many educational districts displeased. At School District 135 in 27 Orland Park, Ill., technology coordinator Rich Kalinski says he sees Apple representatives only occasionally .... 28

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1 "There's no love lost between us and Apple," he says. "Apple killed off the education dealers and now we basically have to deal with Apple only. There are 2 no alternatives," and there is no local tech support, he says. Mr. Kalinski says District 135 will pick a new tech platform next year, and he believes the schools will 3 switch to Windows-based computers. 4 After Apple disclosed its large 4Q00 revenue and EPS shortfall and revealed that poor sales into the K-12 5 education market were a prime reason for the shortfall, Jobs was questioned about this shortfall. According 6 to an October 19, 2000 article in The Wall Street Journal: 7 As for sales to schools and universities, Mr. Jobs attributed slower sales to a change in Apple's sales system. In July, the company transitioned from using a contracted 8 sales force to working with a bigger in-house sales team. "The timing certainly wasn't [smart]," said Mr. Jobs .... 9 216. According to Business Week, in a December 4, 2000 article entitled "How Steve Jobs 10 Failed At School": 11 The truth is that Steve Jobs is at least partly to blame. He made a big mistake earlier 12 this year when he canned the company's longtime freelance educational sales force and brought the effort in-house. 13 What prompted the move was the surprise departure of Apple's top education 14 sales executive, Mike Lorion. He left in the summer just as computers were being bought for the coming academic year. With his departure, Apple decided to dump its 15 longtime network of outside educational sales reps and hire its own sales force. The switch in strategy created chaos, according to the schools. Many administrators 16 said the only way they could reach Apple was through the Internet, while Dell's salespeople were showing up in person. 17 Jobs conceded at Apple's recent briefing on disappointing third-quarter 18 results that switching sales teams during the summer was an error. Revenues slipped in part because of lower education sales. 19 217. Jobs has stated he is "not proud" of all this and has admitted: 20 [L]et me focus on the Apple-specific issues. First, the megahertz gap. Even though our 21 power PC processors are actually faster than Intel's fastest processors for many of the tasks our customers commonly perform, their megahertz is slower. We are very aware of 22 this .... Two, K-12 education sales. We have slipped to No. 2 in education sales behind Dell. We don't like this. But the tragedy is that Dell didn't win it, we lost it. We 23 are still recovering from shooting ourselves in the foot with the sales force transition in July .... Three, Power Mac G4 Cube. The sales of our Power Mac G4 24 Cube have stabilized at a ... level ... far below what we had planned for initially.... Four, CD read/write. Apple completely missed the boat on CD read/write drives. 25 Both HP and Compaq ship approximately half of their computers with CD read/write drives. Apple ships none. We just blew this one. 26 218. Based on Apple's shocking September 28, 2000 revelations and subsequent disclosures, 27 analysts slashed FY00 - FY01 revenue and EPS forecasts for Apple, such that Apple's FY01 revenues 28

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1 were projected to decline (not the 20% growth forecast during the Class Period) to just $7+ 2 billion, $3 billion less than the $9.7-$9.8 billion forecast during the Class Period. Apple also 3 suffered a huge $250 million 1Q01 loss and analysts projected Apple's FY01 EPS, if any, would 4 be small, a far cry from the 15% increase and $2.10-$2.15 forecast during the Class Period. 5 Based on discussions with Apple insiders and industry sources, analysts have now figured out much of what 6 was actually going on inside Apple during Apple's 4Q00 – as the following excerpts from analysts' reports 7 below explain: 8 Lehman Brothers, October 19, 2000: 9 Gross margin of 25% was 160 bp below our expectation of 26.6% and 200 bp below prior guidance of 27%. The reason for the lower than expected gross margin was related 10 to a mix shift to lower margin Power Mac SKUs and accrual charges related to not taking components in Q4 and promotions that will not occur in Q4.... 11 [T]he $180 million shortfall in revenue was related to three factors. The largest contributor 12 was lower than expected Power Mac G4 Cube sales which accounted for $90 million of the shortfall.... [T]hey were only able to sell 107,000 units.... [T]here were three factors 13 related to the short fall in Cube sales. 14 First, the Power Mac G4, while an innovative product from a design standpoint, was priced too high for consumers to purchase.... 15 Second, there was a production problem with some of the Cubes that were 16 shipped to consumers. A shift in the casing which could be caused during shipment would cause the touch switch to be misaligned and cause the G4 Cube 17 to power down at inconvenient times.... In addition, consumers mistook some of the flow lines from the outer casing as cracks. Apple has replaced Cubes that have more 18 pronounced flow lines. Going forward, as Apple ramps up the learning curve on Cube production, these flow lines should not be an issue. We believe that the 19 latter two device specific problems did not help spread good word of mouth amongst PC consumers. 20 Third, consumers appear to be confused about the MHz gap between Intel 21 processors and G4 PowerPC processors.... Apple is working closely with Motorola to obtain faster PowerPC G4 chips so that they can close the Megahertz gap. 22 * * * 23 The second largest culprit for the lower than expected earnings was the poor 24 performance of the education market which accounted for $60 million of the revenue shortfall. Education sales typically account for 20-25% of total sales in the 25 September quarter but accounted for less than this in this particular quarter. Management blames the shortfall [on] an execution problem. Before July, Apple typically sold 26 through the education market via its own sales reps and third party sales reps. Beginning in July, Apple added 150 additional internal sales reps and switched 27 to selling to [the] education market using only its representatives and terminating third party reps. As a result, 40% of Apple's sales reps were new to the company 28 and 50% of Apple's education customers had new sales account managers.

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1 Further exacerbating this problem was the fact that the transition could not have occurred at a worse time (peak season for education sales) for Apple's education 2 business. 3 S.G. Cowen, October 19, 2000: 4 [U]nfortunately, the picture is not pretty. The short term prescription is a sharp curtailment in sales into the channel to reduce the channel overhang .... 5 Basically, revenues fell some $180MM short ... because of three factors. First, the G4 6 Cube ... got off to a slow start, due to pricing and perception issues ($90MM delta). Second, it took a hit in the crucial education season [by] going to a direct rep model ... 7 causing a $60MM hit in this sector. Third, in the Power Mac G4 market, mix was poor as sales of high-end dual processor versions failed to catch. In view of the soft sell through 8 apparent by mid-September, management recognized it would be necessary to take reserve accruals against COGS for pricing action to promote sell through in the December 9 quarter and cancellation charges it would incur with suppliers; gross margins therefore took a hit of another 180 .... 10 Prudential Securities, October 19, 2000: 11 Apple was left with a significant channel inventory overhang at quarter end, 12 estimated at 8 weeks vs. more normalized levels of approx. 5 weeks. Management plans to dramatically reduce sales into the channel in FQ1 .... Management has also 13 significantly lowered the FY01 revenue growth outlook ... to 0% .... 14 * * * 15 [T]he Apple miss was much more company-specific than Apple initially indicated.... 16 First, weaker September sales were attributed to poor sales of the Cube .... [T]he 17 450 MHz labeling suggests a materially slower clock speed. Management noted that the company is working with Motorola to offer significantly higher clock 18 speeds over the next 6 months. 19 Second, management acknowledged a very ill-timed transition in its education sales force during the July timeframe which accounted for a sizeable 20 portion of the miss in sales into the education market (est. at $60MM).... 21 Third, poor Cube sales ($90MM impact) were attributed to customer's perception that the product was overpriced and that there were quality problems. 22 A miss-aligned [sic] power switch caused some products to shut down unexpectedly. In addition, thin plastic lines in the casing were perceived as 23 cracks. 24 UBS Warburg, October 19, 2000: 25 Apple experienced a $180 million revenue shortfall in September .... Apple ended the quarter with three weeks of excess inventory in the dealer channel .... 26 * * * 27 Apple must first bite the bullet of excess channel inventory.... As a result, the December 28 quarter will be a real downer ....

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1 J.P. Morgan, October 19, 2000: 2 Remember inventories are this company's sworn enemy. So, the company ... very simply will be shipping very little in order to reset channel inventories. 3 Gerard Klauer Mattison, October 19, 2000: 4 • Product issues depress high-end product sales, contributing to excess 5 channel inventory. Pricing which was too high as well as technical glitches ... have limited sales of the newly introduced G4 Cube ... reducing revenues by about $90 6 million.... [F]iscal 4Q00 revenues were $30 million lower-than-expected because the company announced dual-processor models of the G4 Power Mac with limited 7 software products that could take advantage of multiple processors, skewing sales to the low-end single processor model with its lower ASP (average selling price) 8 and margins. 9 Apple's new product line-up has not significantly increased demand with consumers or graphics/design professionals and ... the restructuring of Apple's 10 education salesforce dampened sales in that segment.... [I]t is difficult to have a high level of confidence that Apple will be able to generate sufficient and 11 consistent demand going forward .... 12 PaineWebber, October 19, 2000: 13 Q400 RESULTS 14 The biggest disappointment for the company was slower than expected Power Mac G4 Cube sales, followed by poor execution in education sales, and a mix shift to 15 lower priced Power Mac G4 Dual Processor machines. Management attributed slower Cube sales to the relatively higher price of the product at $1,799 .... And cited the 16 transition of its education sales force in July to all Apple sales reps .... While the PowerMac miss was due to slower G4 clock speeds holding back purchases.... [C]ube 17 sales accounted for $90 million, education sales for $60 million, and PowerMac sales for $30 million of the $180 million shortfall. 18 [T]hese factors caused Apple to exit September with a significantly higher than expected 19 eight weeks of channel inventory .... Management will attempt to reduce this level ... punishing results, by the need to liquidate three weeks of channel inventory .... 20 Credit Suisse First Boston, October 19, 2000: 21 Apple's quarter showed a fundamental and fairly comprehensive dropoff 22 in demand. The slowing in demand showed up in two ways: first, channel inventory levels ballooned from 5 weeks at the start of the quarter to 8 weeks 23 exiting the quarter, indicating weak end consumer sell through .... 24 The demand shortfall was broad-based but impacted different product lines unevenly. The education shortfall, accounting for $60 million of the total $180 25 revenue miss, was caused by a poorly timed transition from a third-party educational reseller model to a direct Apple representative-based model. The 26 transition came in July, at the height of the K-12 selling season, and many educational institutions were disaffected by the change from familiar, local resellers to new, often 27 inexperienced, and distant Apple representatives. 28 * * *

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1 The third problem was an unexpected mix skew toward the low end of the G4 Power Mac professional desktop line. This was a new development – typically, on all of 2 Apple's product lines, mix skews to the high end. However, the high end of the PowerMac lineup is the dual-processor model, which adds little in performance over 3 single processor models because the current incarnation of the Macintosh OS, 9.0, cannot fully take advantage of two chips. Only with OSX early next year comes 4 such functionality as SMP (symmetric multiprocessing, or the ability to assign and spread computing tasks over multiple chips), which is necessary to fully enjoy 5 the advantages of multiple chips. 6 219. Reports of imperfections in the supposedly perfectly clear pristine crystal G4 Cube case 7 were widespread. On September 28, 2000, Reuters news service reported: 8 As its earnings outlook eroded on Thursday and investor confidence shattered, Apple Computer was also having to answer to loyal customers who complained that its 9 computers were cracked. Several Apple enthusiasts who have plunked down $1,799 for the shimmering new Power Mac G4 Cube computer said that cracks were 10 appearing in the machine's clear plastic casing, ruining the sleek design that they had paid for. 11 * * * 12 Apple consumers are famously style-minded and will often make a purchase decision 13 based on a computer's color rather than its storage capacity. 14 "I bought my Cube thinking it would be as pristine as the ad photos," one unhappy customer wrote on an Internet message board. "It is my genuine belief 15 that the lines are minor stress cracks caused in the assembly process." "These are really cracks and not mold lines," read another comment. "They weren't here 16 when the machine arrived and they are getting bigger." 17 220. Customers of Apple who purchased the defective G4 Cubes were incensed. They posted 18 messages on Apple's Internet support site, examples of which stated, "These cracks that I am referring to 19 are not mold lines – they are cracks.... You can see them, feel them, watch them grow" (reported on 20 CNET News.com, September 28, 2000); "I bought my Cube thinking it would be as pristine as the 21 ad photos .... It is my genuine belief that the lines are minor stress cracks caused in the assembly 22 process" (Reuters, September 28, 2000); "These are really cracks and not mould lines .... They weren't 23 here when the machine arrived and they are getting bigger." (Reuters, September 28, 2000); [L]et's be 24 real here Apple, these are not 'cosmetic markings.' These are pure and simple cracks. I can fit a piece of 25 paper through three 'cosmetic markings.' What really steams my PC butt, is that Apple still refuses to 26 acknowledge these defects and indeed they are major defects. I've disputed the charge for mine and have 27 gone back to a windows machine"; "We who have the Cube also have the intelligence to know the 28 difference between an assembly defect and a knit or flow line. I can see the knit and flow lines in my 15"

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1 Studio Display. I don't complain about them because they are not cracks. We can tell the difference 2 between 'appear' and 'feel' - - the cracks can be felt. They are more than the 'appearance of a line.'" 3 221. Analysts subsequently realized the negative impact that such defects were having and would 4 continue to have on Apple's sales of its most highly touted product. Chris LaTocq of Gartner Securities 5 was quoted on the C-Net News website as stating, "[i]n a stylish design like this, people are paying 6 for style. And apparent cracks aren't style." Tim Deal, a Technology Business Research analyst, was 7 also quoted in the C-Net report as stating, "[t]he Cube relies almost entirely on its appearance, and 8 it is designed for its appeal.... That's the name of the game with Apple. They're all about design 9 and appearance. You can't promote a product off its design and appearance and have flaws with 10 it, then sweep it under the rug as being normal." 11 222. Apple's 4Q00 revenues were only $1.87 billion with EPS of only $0.30 – far below the 12 levels previously forecast. Apple's FY01 results have also been abnormal as set forth below:

13 FY00 14 01/01/00 04/01/00 07/01/00 09/30/00 Year 15 Net Sales $2,343 $1,945 $1,825 $1,870 $7,983 16 Operating Income $ 100 $ 170 $ 168 $ 84 $ 522 17 Investment Gains $ 134 $ 100 $ 50 $ 83 $ 367 Net Income $ 183 $ 233 $ 200 $ 170 $ 786 18 Net Income Excluding $ 173 $ 160 $ 163 $ 108 $ 609 19 Investment Gains 20 Earnings Per Share Excluding $ 0.50* $ 0.44 $ 0.45 $ 0.30 $ 1.69 Investment Gains 21 * 1Q00 net income excludes a special charge of $90 million for executive bonuses. Inclusive of this charge 22 but excluding investment gains, net income would have been approximately $82 million or $0.46 per share. 23 FY01 24 12/30/00 03/31/01 06/30/01 09/29/01 Year Net Sales $ 1,007 $ 1,431 $1,475 $1,450 $5,363 25 Operating Income (Loss) ($420) ($8) $31 $53 ($344) 26 Investment Gains $71 $5 $11 $1 $88 27 Net Income (Loss) ($247)* $43 $61 $66 ($37)* 28

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1 Earnings (Loss) Per Share ($0.73)* $0.12 $0.17 $0.19 ($0.11)* 2 * Excluding investment gains and effects of new accounting pronouncement. 3 223. The truth about Apple's debacle in the education market was subsequently confirmed by 4 BusinessWeek Online on December 4, 2000: 5 Apple was not simply outmuscled by Michael Dell. The truth is that Steve Jobs 6 is at least partly to blame. He made a big mistake earlier this year when he canned the company's longtime freelance educational sales force and brought the effort in-house. 7 What prompted the move was the surprise departure of Apple's top education 8 sales executive, Mike Lorion. He left in the summer just as computers were being bought for the coming academic year. With his departure, Apple decided to dump its longtime 9 network of outside educational sales reps and hire its own sales force. The switch in strategy created chaos, according to the schools. Many administrators said the only 10 way they could reach Apple was through the Internet, while Dell's salespeople were showing up in person. 11 Jobs conceded at Apple's recent briefing on disappointing third-quarter results that 12 switching sales teams during the summer was an error. Revenues slipped in part because of lower education sales. 13 224. Apple's catastrophe was sneeringly reviewed by Fortune Magazine in a May 14, 2001 14 article: 15 It seemed like deja vu all over again. Reverting to its Perils of Pauline mode, 16 Apple Computer late last September fessed up that sales of its glossy, curvaceous personal computers were running off a cliff. CFO Fred Anderson, in a prepared statement, 17 opaquely explained what had gone wrong: Apple had grossly overestimated demand for CEO Steve Jobs' pet product of that quarter – the pricey Power Macintosh G4 18 Cube; Apple, the erstwhile leading supplier of computers to schools, had also shot itself in the foot with a messy overhaul of its education sales operations right in the middle of the 19 peak summer buying season; and, oh yes, the global economy seemed to be weakening. In the same press release Jobs, the master of "insanely great" hyperbole, characterized the 20 sudden reversal as a "speed bump." The next day Apple's market capitalization collapsed by half. 21 The December quarter showed how abruptly business had slumped. By the time 22 the dust settled, revenues had plummeted 57% from the year-earlier period to a flat $1 billion, and the company was inhaling red ink. Worse, Apple, which Jobs & Co. 23 in the previous three years had rehabilitated into a growing $8-billion-a-year concern, cautioned that revenues would probably dip to around $6 billion for all of fiscal 24 2001, ending next September. Some speed bump. That's about $1 billion shy of where revenues stood when Jobs marched back into the CEO's suite in 1997 and little better than 25 half the $11.1 billion Apple rang up at its high-water mark in 1995. Moreover, Apple's solid revenue growth in 1999 and 2000 masked the fact that the company's share of the 26 PC market had continued to erode – down to less than 4% in the U.S. and 3% worldwide. The truth about Jobs' speed bump: Apple, once a genuine power of PCdom, is 27 shrinking again, threatening to become as inconsequential as Liechtenstein. 28 The article chronicled Apple's misstatements in the education market:

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1 Apple's education distribution needed attention; 2000 was the second consecutive year that Dell Computer outsold Apple in a segment Apple had dominated for two 2 decades, a crucial market that accounts for nearly 40% of its sales. For years the company had relied on a loose affiliation of third-party resellers to move the hardware. 3 Apple's then head of sales, Mitch Mandich, wanted to address the problem by bringing the sales force in-house. He had told Jobs back in January 2000 that he wanted to retire 4 sometime during the year, but he hoped to see through the sales-force transition before he left. Despite protests from CFO Anderson and a couple of directors that the 5 timing was all wrong, Jobs told Mandich to go ahead. 6 Recalls Jobs: "The problem was, we were very straightforward and told these third-party salespeople ahead of time that, 'Hey, in four months we're going to switch 7 and you're going to be out of a job.' Obviously these folks did everything they could to sell as much as they could by June 30, when we let them go, and did 8 absolutely nothing to build for sales in the July quarter. So when our new sales folks got there, they found there was no pipeline work at all; they had to start 9 from scratch. And, duh, this was during the peak buying time for schools. It was just stupid on our part to do this then, and that was my decision. It was a train 10 wreck, and it was totally my fault." 11 The article also confirmed that Apple had to pay huge penalties for cancellation of components it had over- 12 ordered: 13 But it had to pay huge penalty fees for cancellation of key components that it had preordered when it forecast much higher production levels. Also, Apple had to 14 pay rebates and otherwise help its distributors and retailers clear out what had become an 11-week inventory glut to make way for the new products. All that cost 15 big bucks. 16 A look at the numbers shows what happened. Says Tim Cook: "We cut production by about a third, shipping only 650,000 units in the December quarter, which 17 took down sales-channel inventory to 300,000, or about five weeks' worth. That means Apple itself only registered about $1 billion in sales when the actual retail sell-through was 18 $1.6 billion." And Apple absorbed $260 million in one-time charges, about half in rebates and pricing actions to clear inventory and the other half in cancellation charges for unique 19 parts, such as shells for the Cube and slot-load DVD drives. 20 225. On July 3, 2001, Apple completely abandoned the G4 Cube product line, due to 21 weak demand and product problems. On July 4, 2001, the San Jose Mercury News reported: 22 Apple Computer said Tuesday that it would stop making its Power Mac G4 Cube, a machine heavy on design innovation but short on buyers, less than a year after the 23 product line was first sold. 24 Sales of the cube-shaped computer have fallen sharply since its introduction in late July last year, causing Apple to miss earnings projections and contributing to the company's 25 first quarterly loss since Steve Jobs returned as chief executive in 1997. 26 VIII. INSIDER STOCK SALES 27 28

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1 226. As detailed above, these massive sales demonstrate that Apple's high-level insiders knew 2 about the problems at Apple and bailed out before the Company released the negative information to non- 3 inside investors. 4 A. Apple's Senior Officers' Stock Sales Were Unusual and Suspicious 5 227. During the height of the Class Period, while Apple continued to issue false and misleading 6 statements, four of Apple's Senior Officers sold 370,000 shares of their personally held Apple stock during 7 August 25-31, 2000 for proceeds of $21.9 million. These four Apple Senior Officers took the opportunity 8 to sell significant amounts of their Apple stock while in possession of materially adverse non-public 9 information. The sales of Apple stock by Senior Officers during the one quarter which makes up the Class 10 Period and just 20-25 trading days before the devastating revelations of September 28, 2000, include:

11 % of Shares 12 Actually Owned/ 13 Name Position Dates Shares Sold Proceeds 14 Rubinstein Senior Vice President- 8/31/00 100,000 100% $5,944,000 Hardware Engineering 15 Tamaddon Senior Vice President- 8/31/00 70,000 100% $4,214,000 16 Service and Support 17 Tevanian Senior Vice President- 8/30/00 150,000 100% $8,887,500 Software Engineering 18 Heinen Senior Vice President- 8/25/00 50,000 100% $2,856,500 19 General Counsel TOTAL 370,000 100% $21,902,000 20 SALES

21 228. Factoring in these individuals' vested stock options yields the following: 22 Class % of 23 Shares Options Exercise Total Period Holdings Name Held Held Price Holdings* Sales Sold 24 Heinen 0 50,000 $6.844 25 25,000 $17.313 26 50,000 $47.438 125,000 50,000 40.00% 27 Rubinstein 2,353 133,336 $6.625 28 150,000 $6.844

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1 Class % of 2 Shares Options Exercise Total Period Holdings Name Held Held Price Holdings* Sales Sold 3 16,668 $17.313 302,357 100,000 33.07% 4 Tamaddon 0 73,400 $6.844 5 25,000 $17.313 6 50,000 $47.438 148,400 70,000 47.17% Tevanian 2,506 66,666 $6.625 7 275,838 $6.844 8 95,416 $17.313 440,426 150,000 34.06% 9 * Total options held plus total shares held as of July 19, 2000. 10 229. The amount and nature of these stock sales are evidence that the sellers knew of the serious 11 undisclosed conditions inside Apple's business, which were adversely impacting Apple's business at that 12 time and took advantage of that insider information. For instance: 13 Rubinstein: 14 • had sold no Apple stock at all during 2000; 15 • his sale of 100,000 shares on August 31, 2000 for $5.9 million was his largest single sale 16 of Apple stock ever; and 17 • this sale constituted 100% of the Apple stock Rubinstein actually owned and 33% of his vested stock options plus stock actually owned. 18 Tevanian: 19 • had sold no Apple stock at all during 2000; 20 • his sale of 150,000 shares on August 30, 2000 for $8.8 million was his largest single sale 21 of Apple stock ever; and 22 • this sale constituted 100% of the Apple stock Tevanian actually owned and 34% of his vested stock options plus stock actually owned. 23 Tamaddon: 24 • sold almost three times as many shares on August 31, 2000 than he had sold in all of 2000 25 to that date; 26 • his sale of 70,000 shares on August 31, 2000 for $4.2 million was his largest single sale of Apple stock ever; and 27 • this sale constituted 100% of the Apple stock Tamaddon actually owned and 47% of his 28 vested stock options plus stock actually owned.

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1 230. The highly unusual nature and timing of these Senior Officers' stock sales is also evidence 2 that they acted with scienter and capitalized on defendants' failure to disclose the adverse non-public 3 information. The unusual nature and timing of the Senior Officers' stock sales is evidenced by the following: 4 (a) Four of the Company's Senior Vice Presidents, including the Senior Vice 5 Presidents in charge of Hardware Engineering, Software Engineering, Service and Support and Legal 6 Affairs – including insider selling compliance – all sold substantial amounts of their Apple stock just 20-25 7 trading days before the Company revealed its disastrous 4Q00 financial results – it is impossible that 8 problems as pervasive and serious as those that destroyed Apple's 4Q00 results and FY01 prospects 9 could have suddenly developed in that 20-25-day period; 10 (b) Moreover, it is also unusual that the Senior Officers who suddenly decided to sell 11 their Apple stock did so two-thirds of the way through the back-to-school and holiday buying seasons – 12 the strongest seasonal period of Apple's business, which Apple said was going well and was going to 13 produce strong revenue and EPS growth; 14 (c) The unusual timing and suspicious nature of the Senior Officers' insider stock sales 15 is also evidenced by the fact that all of the sales of Apple stock by these Senior Officers occurred 16 immediately prior to the time when Apple stock began to decline, during the time when shares of Apple 17 stock were artificially inflated by the false statements made by Apple; and 18 (d) These stock sales occurred just as Apple was supposedly successfully introducing 19 three new and greatly enhanced personal computer products which caused Apple to increase its 4Q00 and 20 FY01 revenue and EPS forecasts, which logically would have caused Apple's stock to continue to surge 21 upward, generating greater profits for Apple insiders who held their stock or vested options while this good 22 news came forth, and Apple's stock went higher. Yet, instead of holding onto their Apple stock or vested 23 options – the logical course of action – these key insiders – who knew the truth about what was going 24 on inside Apple (and that it was far different than what Apple was saying publicly or the investing 25 public knew) – bailed out, selling 33%-47% of their Apple stock and vested stock options. 26 231. The stock sales by Apple's top insiders are dramatic evidence that they already knew what 27 Apple would not reveal for another 20-25 trading days – that Apple's rearrangement of its distribution 28 system to the K-12 education market was a disaster and that its three most important new personal

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1 computer products were flawed in design, manufacture and operation and doing very poorly with 2 consumers and, as a result, Apple could not possibly meet its 4Q00 forecast. 3 232. Apple has an insider stock sale protocol that monitors the stock sales by its top executives 4 and requires that any significant sale of stock by a top corporate officer be cleared in advance with the 5 general counsel of Apple, Heinen. As a result of this protocol, Heinen as the general counsel is in a unique 6 position – she and she alone knows the overall insider selling activities of Apple's top executives before 7 anyone else knows it – in fact, before the sales even occurred. Thus, even though she is not as involved 8 in Apple's daily operations as the other Senior Officers, she is in a position to determine when top insiders 9 who are intimately involved in Apple's daily operations are selling off their Apple stock due to their 10 knowledge of serious undisclosed business problems inconsistent with what Apple is saying to the 11 investment community. She knew, therefore, that three Apple Senior Vice Presidents who were intimately 12 involved in Apple's day-to-day operations, including the launching of its critical new products, were going 13 to bail out of their Apple stock right at the very moment when Apple was supposedly poised to have one 14 of its strongest 4Qs in history due to the tremendous success it was achieving with its revolutionary new 15 personal computer products – a situation which, if true, would cause executives to want to buy Apple 16 stock, not sell it or, at least, hold on to their vested stock options and exercise those options only later after 17 Apple's stock price had advanced further, reflecting these business successes. Thus, Heinen knew that top 18 executives were going to bail out of their Apple stock – conduct completely inconsistent with the claims 19 that were being made publicly by Apple. Seeing this warning sign before anyone else saw it, Heinen bailed 20 out too, selling 50,000 shares of her Apple stock. 21 233. As demonstrated above, the stock sales of Apple officers Rubinstein, Tamaddon, Tevanian 22 and Heinen constituted 100% of the Apple stock they actually owned and 100% of the Apple stock each 23 of them acquired by exercise of stock options during the Class Period and 33%, 47%, 34% and 40% of 24 their total holdings (stock owned plus vested options) of Apple stock, respectively. These sales were 25 unusual in amount. None of these officers acquired any Apple stock during the Class Period by option 26 exercise or otherwise and continued to own that stock. They sold 100% of the stock they already owned 27 or acquired via option exercise because they knew the stock was artificially inflated and would decline 28 sharply in price when the true facts, which they were concealing, became public.

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1 234. The fact that some Apple officers did not exercise all of their options does not exculpate 2 defendants. First of all, none of these officers wanted to acquire any Apple stock during this period and 3 continue to hold it because they knew the stock was artificially inflated and would collapse when the true 4 facts became known. Thus, none of them exercised any of their vested stock options for the purpose of 5 acquiring and continuing to hold and own Apple stock. In addition, none of these officers were willing 6 to exercise more vested stock options to acquire Apple stock and immediately sell that stock for several 7 reasons. First of all, each of the officers realized that their stock sales would become known to the public, 8 through public reporting of either their Form 144s or Form 4s which they had to file with the SEC to 9 disclose their sales. This public reporting and disclosure acted as a significant market force restraint on the 10 amount of stock these officers could actually sell. Many sophisticated investors and several insider stock 11 selling or short-selling stock newsletter services closely track insider selling by corporate executives at 12 major corporations and then quickly publicize that information as a sign that something is likely seriously 13 wrong at a corporation that has not yet been disclosed – negative publicity which can result in analyst 14 inquiries and often a decline in the stock price. Therefore, while these Apple officers wanted to unload 15 significant amounts of the stock they actually owned or could acquire by stock option exercise, they realized 16 that they had to exercise some restraint and not exercise all their vested stock options and sell the 17 stock acquired thereby because of the negative consequences outlined above. Thus, the Apple 18 officers who sold stock sold only as much of their Apple stock and vested stock as they thought they could 19 without generating trouble and negative publicity. 20 235. These Apple officers also each had an economic motive for behaving in this way, i.e., not 21 exercising all of their vested stock options and selling off the stock, even though they knew that Apple stock 22 was selling at artificially inflated prices and would likely shortly decline sharply in price. First of all, their 23 vested options would remain vested for several years and thus even a sharp decline in Apple stock in the 24 near term would not completely eliminate the value of these options. These officers had the option of 25 holding onto these options hoping the stock would later recover and they could then exercise these options 26 and sell the stock. Also, these officers knew that they always had the option after the negative information 27 they were concealing became public and Apple's stock price declined sharply, to take their unexercised 28 vested stock options and get Apple's Board of Directors to re-price them downward with much, much

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1 lower exercise prices and longer exercise lives and thus restore the value in those unexercised vested stock 2 options. Thus, these officers did not have the same type of economic motive to sell off all of their vested 3 stock options as they did to sell off any stock they actually owned outright, because, while the impending 4 price decline in the Apple stock they owned outright and did not sell could be a permanent economic loss 5 for them, the negative economic impact of a later stock price decline on vested but unexercised stock 6 options could be easily avoided by them by the expedient of having their options re-priced at much lower 7 exercise prices. As a result of the foregoing, these officers actually sold during the Class Period all of the 8 shares of stock of Apple which they actually owned by way of existing actual ownership or exercise 9 of vested stock options and all or nearly all they rationally could sell via the exercise of vested stock options 10 without generating adverse publicity and inquiry, which might result in the premature disclosure of their 11 fraudulent scheme and a decline in and negative impact on the stock price of Apple. By selling off their 12 large amounts of Apple stock when they did, the Apple officers not only personally profited from the 13 artificial inflation in the price of Apple stock that their false and misleading statements and manipulations had 14 created, they also avoided losing millions, which they would have lost had they waited until the true facts 15 they were concealing were known to the market before they sold their stock at much lower levels. 16 236. While the Apple officers who sold stock also owned vested stock options which were not 17 exercised, their stock sales were still significant in amount and unusual in timing. Ownership of stock 18 options is considerably different from ownership in stock. 19 237. A stock option is a right to purchase a security for a pre-determined price (the exercise 20 price) on or before a specified expiration date. It is common for publicly traded companies to compensate 21 their management, in part, by granting them long-term stock options which vest over time. No money 22 changes hands at the time these options are granted. Since stock options are a "free ride," there is no 23 fundamental economic incentive to exercise options before they expire unless a holder expects to see poor 24 stock performance. 25 238. Apple used stock options as part of its compensation package for the Company's 26 management. These stock options were typically several years in length and became vested slowly in 27 monthly increments over the succeeding three years and lapsed after several years, thus providing a multi- 28 year "free ride" to Apple management.

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1 239. Ownership of stock options is considerably different from ownership of common stock. 2 First, stock options have no capital at risk. The exercise price is not paid until the option is exercised. Thus, 3 an option has substantial upside potential without the downside risk. Second, owners of stock options do 4 not have voting rights. Consequently, stock option holders cannot vote in matters of corporate governance. 5 Third, stock options do not receive dividends. Fourth, stock options are not "marginable" the way stock 6 is. Fifth, stock options issued by a company are not freely tradeable. Because of this, they have to be held 7 to maturity to realize their full economic value. As a result of these significant differences, one cannot and 8 should not lump an insider's stock ownership together with an insider's vested options to determine the 9 insider's "total holdings" of stock in the company. In fact, none of the insider trading services that collect 10 and disseminate information about securities by corporate insiders include vested stock options in their 11 calculation of the insider's "total holdings" of stock. 12 240. Vested stock options do not carry the same economic risk as actual stock ownership. If 13 a stock price declines, the owner of the stock suffers a real economic loss of the money paid for the stock. 14 The holder of a vested stock option does not lose any invested money; at worst, the option holder suffers 15 a reduced expectancy of profit in the future. Thus, vested options are not the equivalent of common stock 16 owned because stock actually owned carries all of the indicia of ownership – no further action or 17 expenditure is required. The owner's invested cash is actually at risk to any market price decline. The 18 holder of a vested stock option has no invested cash and no money at risk until that person actually 19 purchases the stock, i.e., pays the exercise price. To actually own the stock, the option holder must put 20 capital at risk. Thus, the failure of some Apple officers to exercise any more of their vested options, i.e., 21 their failure to purchase more Apple stock, is consistent with plaintiffs' theory of the case – these insiders 22 were getting out of their Apple stock, not buying more. Exercising more options would be investing in 23 Apple, while these Apple officers were divesting themselves of their Apple stock. 24 241. Executives do not face the same risk of loss in stock options as they do with common stock 25 – because they did not pay for the options, and because a company can always lower the exercise price 26 of the options if the price of the stock falls: 27 Directors simply lower the options' exercise prices to the stock's current price level. Presto! The options can soon be back in the money again. It doesn't matter if the stock 28 ever returns to the levels where the options were originally issued.

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1 E. S. Browning & Laura Jereski, In the Money: Firms With Sagging Stocks Set New "Repricings" of 2 Executive Options, Wall St. J., June 1, 1997, at C1; see Adam Levy, The New Math of CEO Pay, 3 Bloomberg, July 1999, at 24: 4 CEOs, already richly compensated, now get stock options that reward them even when they don't deliver for their shareholders. The practice is called repricing. 5 * * * 6 Options – grants that let executives buy stock at a certain price during a set period 7 of time – were supposed to tie CEO pay to company performance. If the stock went up, the options were worth a bundle. Now, companies are repricing options to give executives 8 a shot at cashing in even though their stocks have sunk. In short, options have become an entitlement rather than an incentive. 9 242. Because stock options are not freely tradeable, they cannot simply be sold on the open 10 market at a price approximating their value. For the holder to make a disposition, the stock option first has 11 to be exercised, i.e., the holder pays the exercise price in return for the underlying stock. Then the stock 12 can be sold at the market price. Absent transaction costs, the proceeds to the stock option holder thus 13 equal the price received for the sale of the stock, less the exercise price paid. This is also known as an 14 option's intrinsic value. However, the economic value of a stock option equals the intrinsic value, plus a 15 premium reflecting the substantial upside potential of the option. This is similar to the option premium that 16 an investor pays when he buys options in the open market. 17 243. As a stock option approaches its expiration date, the economic value and intrinsic value 18 converge. Therefore, a stock option has to be held until expiration to realize its full economic value. 19 Ownership of stock has no such considerations. 20 B. Options Valuation Provides Additional Evidence of Scienter 21 244. An analysis of the timing of an insider's exercise of stock options and sale of the underlying 22 shares can provide clear and convincing evidence that these transactions were based on non-public 23 information. The analysis is based on the common sense notion that executives will not irrationally, and 24 needlessly, waste large amounts of their wealth absent information that the asset they hold is about to 25 radically decline in value. If the finder of fact is unwilling to believe that financially sophisticated executives, 26 privy to all of a company's non-public information, would engage in dramatically irrational personal financial 27 28

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1 decisions, then a strong inference can be drawn that transactions were based on non-public information, 2 and therefore illegal. 3 245. Options are valuable rights because an option allows its owner to preserve the opportunity 4 for upside gain without any capital commitment and without any risk of loss. One analytical tool used to 5 value options is the universally accepted method for calculating the value of stock options, named for its 6 authors, Black and Scholes, who earned the Nobel Prize for this now well-established methodology.10 The 7 Black Scholes formula calculates the expected market value of any option based on several factors: stock 8 price; exercise price of the option; expiration date of the option; volatility of the stock; and the risk-free rate 9 of return. At any time prior to its expiration date, the market value of an option has two components: 10 (a) "intrinsic value," the amount of money that one could obtain by exercising the option as of today (stock 11 price less the strike or exercise price of the option); and (b) "time value," the value from any potential 12 increase in the stock price during the term of the option. The formula demonstrates that a rational 13 investor in an environment of efficient markets, relying solely upon public information, will be 14 hesitant to exercise an option prior to the expiration date of the option, since an early option 15 exercise forfeits the time value of the option. 16 246. Holding the option to maturity maximizes the holder's wealth, assuming that the holder 17 makes transactions based only on public information. At a practical level, most early option exercises 18 sacrifice very little value in this manner (i.e., less than 5%) and therefore do not sufficiently raise an 19 inference of insider trading. However, some early option exercises would result in the loss of substantial 20 wealth. Such exercises are avoided by executives for this exact reason. Indeed the rational executive will 21 never forfeit more than a small amount of the value of an option because it is unnecessary to do so. Any 22 desire for asset liquidity or diversification can be achieved by any number of financial instruments readily 23 available and commonly used by executives. For example, executives commonly protect themselves from 24 risk by the use of put options, call options, zero cost collars, and equity swaps. All these instruments are 25 readily available, are commonly used, and can be obtained by a simple phone call to a broker. Similarly, 26 information regarding these options is readily available to these executives through financial advisors and

27 10 See generally F. Black and M. Scholes, The Pricing of Options and Corporate Liabilities, J. Pol. Econ. (May/June 1973); S. Natenberg, Options Volatility & Pricing: Advanced Trading Strategies 28 and Techniques (1994); V. Bhensali, Pricing and Managing Exotic and Hybrid Options (1998). FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 102 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 107 of 116

1 is part of the course work involved in obtaining business degrees. Further, such instruments are commonly 2 used by executives in performing their duties. 3 247. Should the holder of an executive option exercise these options early, the Black Scholes 4 formula quantifies the resulting market loss to the executive. The premature exercise of vested options 5 where such an exercise substantially reduces the apparent wealth of the executive can be 6 explained as rational, i.e., to maximize the returns on their asset, only if the Apple officers were 7 in possession of material adverse undisclosed inside information. Those Apple officers would be 8 willing to forego the time value of the option because they know that the current value is based upon an 9 artificially inflated stock price – a price that does not yet reflect the non-public adverse information on 10 which the executive is basing his or her decision to exercise and sell his or her stock. 11 248. The Black Scholes formula often is used by corporations to value their executive stock 12 options in conformance with Statement of Financial Accounting Standards No. 123. For example, 13 Gateway Inc., Adaptec Inc. and 3Com Corporation have reported in their proxy statements that they all 14 recently used the Black Scholes formula for valuing executive options. 15 249. Using Black Scholes in this case reveals that Rubinstein exercised 16,668 options in a way 16 which demonstrates his use and possession of inside, non-public information. In particular, on August 31, 17 2000, Rubinstein prematurely exercised options for 16,668 shares – options that would not have expired 18 for over eight years. The total value of these options on that day was $876,974. That is, were one to 19 attempt to purchase such options at an options exchange or in an over-the-counter transaction, one would 20 have paid approximately $876,974 to obtain options with rights similar to those held by Rubinstein. 21 Nevertheless, Rubinstein prematurely exercised his options and obtained only $702,206. Absent 22 Rubinstein's possession and use of inside information, Rubinstein's transaction makes no rational sense as 23 he forfeited $174,768 of expected value by this early exercise.11 24 250. By contrast, Rubinstein's otherwise irrational act is clearly rational when viewed as a 25 decision based on inside information. The options that were valued at $876,974 using public information 26 on the day he exercised the options declined precipitously to $337,533 after the bad news was

27 11 The source of information for all of the calculations in this section are Apple's Proxy Statements, the officers' Forms 3, 4, 5 and 144 filed with the SEC, publicly available risk-free interest rate data, publicly 28 available volatility calculations for Apple stock, and publicly available Apple price data. FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 103 - Case 4:01-cv-03667 Document 61-1 Filed 01/31/2003 Page 108 of 116

1 revealed. Hence, Rubinstein's otherwise irrational exercise of these options, was, in fact, rational if based 2 upon inside information of Apple's pending stock crash. Indeed, Rubinstein's use of inside information led 3 him to realize a $364,673 profit over what he would have obtained had he held onto his options. Such 4 trading is clearly suspicious and is designed to maximize the personal benefit from undisclosed inside 5 information. 6 251. More importantly, using the Black Scholes equation we can also analyze those options 7 which Apple insiders did not exercise. For example, during the Class Period, Jobs chose not to exercise 8 options for 15,000,000 shares with an exercise price of $43.59. However, the fact that he chose not to 9 exercise these options in no way defeats scienter in this case. In particular, the Black Scholes valuation of 10 these options on September 28, 2000 was $640,067,766. Had Jobs exercised and sold these options 11 he would have obtained only $148,590,000, a loss of almost one-half billion dollars, or 76.79%, 12 in the value of these options. No rational investor would have sold these options in this case. Jobs' 13 decision not to exercise these options makes sense even if he had based his decision on insider 14 information as the value of these options after the bad news was revealed was still $264,675,848, 15 or almost $116,685,848 more than he would have obtained by early exercise during the Class 16 Period. Because no executive would ever exercise such an option under these circumstances, this option 17 is not in any way informative of Jobs' holdings available for sale and should not be considered as such by 18 this Court. 19 252. Similarly, it is reasonable to expect, and plaintiffs allege and will prove at trial, that a lawful 20 rational executive would never exercise an option in which he or she would incur greater than a 20% loss 21 by its premature exercise. Removing such irrational option exercises from Apple officers' "available 22 holdings" demonstrates that the following options should not be considered as "available holdings" for 23 purposes of analyzing Apple officers' stock sales:

24 Pre-Crash Proceeds by Penny Per Option Class Period Wealth Dollar 25 Number Value Exercise Lost if Obtained 26 Name of Options (9/28/00) (9/28/00) Exercised if Exercised Heinen 25,000 $1,173,537 $904,675 $268,862 77¢ 27 50,000 $2,100,575 $303,100 $1,797,475 14¢ 28

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1 Pre-Crash Proceeds by Penny Per Option Class Period Wealth Dollar 2 Number Value Exercise Lost if Obtained 3 Name of Options (9/28/00) (9/28/00) Exercised if Exercised Tevanian 95,416 $4,478,968 $3,452,819 $1,026,149 77¢ 4 Tamaddon 25,000 $1,173,537 $904,675 $268,862 77¢ 5 50,000 $2,100,575 $303,100 $1,797,475 14¢ 6 Jobs 15,000,000 $640,067,766 $148,590,000 $491,477,766 14¢ 7 As such, failure to sell these options does not defeat scienter, for no lawful executive would ever have sold 8 these options. 9 253. Plaintiffs have also submitted the attached Declaration of Scott D. Hakala ("Hakala Decl.") 10 which confirms these same results using an alternative option valuation technique. Dr. Hakala comes to the 11 same conclusion regarding Jobs' options, namely that it would have made sense for Jobs to have exercised 12 the 15,000,000 options he held. 13 254. Removing these options from available holdings produces the following results for Heinen, 14 Tevanian and Tamaddon: 15 Excludable Original % Corrected % 16 Name Options of Sales of Sales 17 Heinen 75,000 40% 100% 18 Tevanian 95,416 34.06% 43.47% Tamaddon 75,000 47.17% 95.37% 19 20 In addition, removing such options makes clear that Jobs had only 60,000 options rationally available for 21 exercise. 22 C. Statistical Analysis Provides Additional Evidence of Scienter 23 255. Plaintiffs hereby incorporate the contents of the Hakala Decl., attached as Exhibit B. Dr. 24 Hakala is an expert in security market econometrics. 25 256. It has been shown through scientific method that the Apple officers' sales were based on 26 the possession and use of inside information. According to Dr. Hakala, the stock sales are statistically 27 associated with the bad news ("subsequent adverse disclosures") revealed to investors. Dr. Hakala is an 28 expert in the field of financial economics. According to Dr. Hakala, there is less than one chance in 100

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1 that Apple officers traded in the manner they did independent of the possession and use of material, adverse 2 non-public information. Hakala Decl., ¶¶5, 17. In other words, Dr. Hakala's study concluded the 3 probability that the Apple officers traded on inside information is greater than 99%. This level of certainty 4 far exceeds the scientific acceptance standard (95%), plaintiffs' civil standard of proof, and plaintiffs' 5 pleading burden. These results are summarized in the following chart:

6 Meets Standard for Confidence Level Inferring Association 7 Associated with Threshold for of Insider Sales Test of Statistical with Subsequent 8 Name Independence Significance Adverse Disclosure 9 Tamaddon >.99 .95 Yes 10 Rubinstein >.99 .95 Yes 11 Tevanian >.99 .95 Yes 12 Heinen >.99 .95 Yes As a Group >.99 .95 Yes 13 14 As such, plaintiffs have met their pleading burden for scienter because plaintiffs have proven with 99% 15 certitude that defendants traded on inside information, a level that far exceeds their pleading and proof standards. 16 17 257. Plaintiffs further incorporate by reference, the contents of the Steinholt Decl., attached 18 hereto as Exhibit C. The Steinholt Decl. confirms that Apple's share repurchase program was primarily designed to mitigate dilution from executive stock option grants, boost EPS and support Apple's stock 19 20 price in the short term. CLASS ACTION ALLEGATIONS 21 IX. 258. Plaintiffs bring this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal 22 23 Rules of Civil Procedure, on behalf of a class consisting of all persons who purchased Apple stock during 24 the Class Period and who were damaged thereby (the "class"). 25 259. The members of the class are so numerous that joinder of all members is impracticable. 26 There were over 324 million shares of Apple common stock issued and outstanding. There are hundreds 27 of thousands of members in the proposed class. Record owners and other members of the class may be 28

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1 identified from records maintained by Apple or its transfer agent and may be notified of the pendency of 2 this action by mail, using a form of notice similar to that customarily used in securities class actions. 3 260. Plaintiffs' claims are typical of the claims of the members of the class as all members of the 4 class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained 5 of herein. 6 261. Plaintiffs will fairly and adequately protect the interests of the members of the class and have 7 retained counsel competent and experienced in class and securities litigation. 8 262. Common questions of law and fact exist as to all members of the class and predominate 9 over any questions solely affecting individual members of the class. Among the questions of law and fact 10 common to the class are: 11 (a) Whether the federal securities laws were violated by defendants' acts as alleged 12 herein; 13 (b) Whether statements made by defendants to the investing public during the Class 14 Period misrepresented material facts about the business, operations and financial condition of Apple; and 15 (c) To what extent the members of the class have sustained damages and the proper 16 measure of damages. 17 263. A class action is superior to all other available methods for the fair and efficient adjudication 18 of this controversy since joinder of all members is impracticable. The damages suffered by individual class 19 members may be relatively small, thus the expense and burden of individual litigation make it impossible for 20 members of the class to individually redress the wrongs done to them. There will be no difficulty in the 21 management of this action as a class action. 22 X. NO SAFE HARBOR 23 264. The statutory safe harbor provided for forward-looking statements under certain 24 circumstances does not apply to any of the allegedly false statements pleaded in this complaint. The specific 25 statements pleaded herein were not specifically identified as "forward-looking statements" when made. To 26 the extent there were any forward-looking statements, there were no meaningful cautionary statements 27 identifying important factors that could cause actual results to differ materially from those in the purportedly 28 forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any

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1 forward-looking statements pleaded herein, Apple is liable for those false forward-looking statements 2 because at the time each of those forward-looking statements was made, the particular speaker knew that 3 the particular forward-looking statement was false, and/or the forward-looking statement was authorized 4 and/or approved by a Senior Officer of Apple who knew that those statements were false when made. 5 XI. CLAIM FOR RELIEF 6 FIRST CLAIM FOR RELIEF 7 For Violation of §10(b) of the Exchange Act and Rule 10b-5 Against Apple 8 265. Plaintiffs incorporate ¶¶ 1-264 by reference. 9 266. During the Class Period, defendant Apple through its Senior Officers disseminated or 10 approved the false statements specified above, which it knew or recklessly disregarded were misleading 11 in that they contained misrepresentations and failed to disclose material facts necessary in order to make 12 the statements made, in light of the circumstances under which they were made, not misleading. 13 267. Defendant Apple violated §10(b) of the Exchange Act and Rule 10b-5 by: 14 (a) Employing devices, schemes and artifices to defraud; 15 (b) Making untrue statements of material facts or omitting to state material facts 16 necessary in order to make the statements made, in light of the circumstances under which they were made, 17 not misleading; or 18 (c) Engaging in acts practices and a course of business that operated as a fraud or 19 deceit upon plaintiffs and others similarly situated in connection with their purchases of Apple publicly 20 traded securities during the Class Period. 21 268. Plaintiffs and the class have suffered damages by paying artificially inflated prices for Apple 22 publicly traded securities in reliance on the integrity of the market. Plaintiffs and the class would not have 23 purchased Apple publicly traded securities at the prices they paid, or at all, if they had been aware that the 24 market prices had been artificially and falsely inflated by defendants' misleading statements. 25 269. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and the other 26 members of the class suffered damages in connection with their purchases of Apple publicly traded 27 securities during the Class Period. 28

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1 270. In ignorance of the fact that the market price of Apple common stock was artificially 2 inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or 3 upon the integrity of the market, plaintiffs and the other members of the class acquired Apple stock during 4 the Class Period at artificially high prices and were damaged thereby. 5 271. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and the other 6 members of the class suffered damages in connection with their respective purchases of Apple stock during 7 the Class Period. 8 SECOND CLAIM FOR RELIEF 9 For Violation of §20(a) of the Exchange Act Against Jobs 10 11 272. Plaintiffs incorporate ¶¶1-264 by reference. 12 273. Defendant Jobs acted as a controlling person of Apple within the meaning of §20(a) of the 13 Exchange Act. By reason of Jobs' position as CEO of Apple, Jobs controlled and directed all of Apple's 14 officers and employees and had the power and authority to cause Apple to engage in the wrongful conduct 15 complained of herein. By virtue of Jobs' high-level position, substantial stock holdings, participation in 16 and/or awareness of Apple's operations and/or intimate knowledge of its internal financial condition, 17 business practices, products and the actual progress of development and marketing efforts, Jobs had the 18 power to influence and control and did influence and control, directly or indirectly, Apple's decision making, 19 including the content and dissemination of the various statements which plaintiffs contend are false and 20 misleading. 21 XII. PRAYER FOR RELIEF 22 WHEREFORE, plaintiffs pray for relief and judgment as follows: 23 A. Determining that this action is a proper class action pursuant to Rule 23; 24 B. Awarding damages in favor of plaintiffs and the other class members in an amount to be 25 proven at trial, including interest thereon; 26 C. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and 27 the federal statutory provisions sued hereunder, pursuant to Rules 64, 65 and any other appropriate state 28 law remedies;

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1 D. Awarding plaintiffs and the class their reasonable costs and expenses incurred in this action, 2 including counsel fees and expert fees; and 3 E. Such other and further relief as the Court may deem just and proper. 4 XIII. JURY DEMAND 5 Plaintiffs hereby demand a trial by jury.

6 DATED: January 31, 2003 MILBERG WEISS BERSHAD HYNES & LERACH LLP 7 PATRICK J. COUGHLIN RANDI D. BANDMAN 8 SYLVIA WAHBA 9 ELI R. GREENSTEIN

10 /s/ Patrick J. Coughlin 11 PATRICK J. COUGHLIN 100 Pine Street, Suite 2600 12 San Francisco, CA 94111 Telephone: 415/288-4545 13 415/288-4534 (fax) 14 MILBERG WEISS BERSHAD HYNES & LERACH LLP 15 WILLIAM S. LERACH THOMAS E. EGLER 16 401 B Street, Suite 1700 San Diego, CA 92101 17 Telephone: 619/231-1058 18 619/231-7423 (fax) 19 Lead Counsel for Plaintiffs 20 21 22 23 24 25 26 27

28 G:\Cases-SF\Apple-01\CMB80864.cpt

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1 DECLARATION OF SERVICE BY FACSIMILE PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2) 2 3 I, the undersigned, declare: 4 1. That declarant is and was, at all times herein mentioned, a citizen of the United States and 5 a resident of the County of San Francisco, over the age of 18 years, and not a party to or interest in the 6 within action; that declarant's business address is 100 Pine Street, 26th Floor, San Francisco, California 7 94111. 8 2. That on January 31, 2003, declarant served by facsimile the FIRST AMENDED 9 CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 10 1934 to the parties listed on the attached Service List and this document was forwarded to the following 11 designated Internet site at: 12 http://securities.milberg.com 13 3. That there is a regular communication by facsimile between the place of origin and the 14 places so addressed. 15 I declare under penalty of perjury that the foregoing is true and correct. Executed this 31st day 16 of January, 2003, at San Francisco, California. 17 18 /s/ Carolyn Burr 19 Carolyn Burr 20 21 22 23 24 25 26 27 28

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1 APPLE-01 Service List - 01/31/03 2 Page 1

3 COUNSEL FOR PLAINTIFF(S) 4 * Randi D. Bandman * William S. Lerach 5 MILBERG WEISS BERSHAD HYNES & Thomas E. Egler LERACH LLP MILBERG WEISS BERSHAD HYNES & 6 100 Pine Street, Suite 2600 LERACH LLP San Francisco, CA 94111-5238 401 B Street, Suite 1700 7 415/288-4545 San Diego, CA 92101-5050 415/288-4534 (fax) 619/231-1058 8 619/231-7423 (fax) 9 COUNSEL FOR DEFENDANTS 10 **George A. Riley ***Robert C. Vanderet 11 O'MELVENY & MYERS LLP Seth Aronson 275 Battery Street, Suite 2600 O'MELVENY & MYERS LLP 12 San Francisco, CA 94111-3305 400 South Hope Street 415/984-8700 Suite 1060 13 415/984-8701 (fax) Los Angeles, CA 90071-2899 213/430-6000 14 213/430-6407 (fax) 15 *Denotes service via U.S. mail on January 31, 2003. 16 **Denotes service via hand delivery on January 31, 2003. ***Denotes service via facsimile and Federal Express on January 31, 2003. 17 18 19 20 21 22 23 24 25 26 27 28

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 - C-01-3667-CW - 112 - WITNESS SUMMARIES APPENDIX WITNESS SUMMARIES ' CW1 :

Employment and Job Responsibilitie s

CW1 was employed by Apple Computer, Inc . ("Apple" or the "Company") from 1995 until August 2000 when he/she resigned to join another technology company. From 1998 through August 2000, CW1's position was Senior Production Supervisor . CW1 was directly responsible for monitoring and supervising activities ofmanufacturing technicians, materials handlers and assembly line workers.

G4 Cube Problems

CW 1 confirmed that Apple experienced several production problems with the PowerMac and G4 Cube. He/she believed most of the production problems were related to the unique manufacturing requirements of the G4 Cube and the Cube casing . He/she stated that the physical placement of the internal component parts in the Cube was significantly different than Apple's typical tower computers . As a result, during final design and test manufacturing, Apple had to make several adjustments to its manufacturing and assembly line operations to support mass production, including adjusting automated assembly machines . Additionally, various hand held tools needed to be designed and built to work with the unique Cube components. All of this slowed production, causing severe delays in the Cube's release . Further, CW1 stated that at least "75%-80%" of the Cubes he/she saw before his/her departure in August 2000 suffered from cosmetic imperfections . CW1 believed the Cube was not amenable to mass production because of the above and because he/she witnessed technicians polishing and assembling Cubes by hand. CW 1 confirmed that Apple was behind schedule and was still preparing to ship the Cube when he/she resigned in August 2000 . CW 1 was also aware of an early August 2000 memo (the "call to arms" memo) from Vice President of Hardware Jonathan Rubinstein which was sent to all production and engineering supervisors as a "call to arms" to ramp up Cube production as soon as possible, i.e., because of problems encountered.

Information attributed to CW2, CW3 and CW4 was obtained by a consultant working with plaintiffs who was attempting to garner an understanding of the manufacturing process of the G4 Cube. During this process, the consultant did not identify the litigation . Thus, the information is less focused and more attenuated than information provided by other CWs reported herein.

1 CW2 :

Employment and Job Responsibilities

CW2 was the Cube's Lead Product Designer and helped manage Apple's desk top designs during the Class Period, including the Cube, iMac and Apple's tower computers . CW2 directed the efforts of industrial designers and packaging engineers .

G4 Cube Problems

CW2 stated that every aspect of the Cube development including heat transfer, plastic fabrication and substructure development was never done before . Due to the complexity of design, many changes were made throughout the development process . CW2 stated that the Cube's mold lines on the casing were impossible to eliminate . Since the Cube casing was clear in appearance, the smallest of lines were highly visible . CW2 stated that Jobs' hype of the product opened the door for customer complaints . CW2 also stated that the Cube project was finished in 12 months when it was supposed to be completed in six to eight months .

CW3 :

Employment and Job Responsibilitie s

CW3 was employed by Apple from 1981 through 1996 as an Industrial Design Manager in the Industrial Design Group. During Cube development through the Class Period, CW3 was employed as a Design Manager by Shinei Intl ., a third party design and production partner of Apple's in Singapore that helped design and produce the G4 Cube .

G4 Cube Problems

CW3 stated that the cosmetic appearance problems were caused by the knit lines in the plastic casing which looked like cracks . The lines were created when cooling plastic would meet after it flowed around an opening in the mold . Apple required the Cube casing to be made from acrylic which did not flow properly and caused structural weaknesses. The reject rate for the Cube project was extremely high at over 50%, causing six month delays in the project . The changes constantly made by Apple's industrial design and product teams made things worse . CW3 confirmed that Apple's Vice Presidents of Industrial Design (Dan Riccio) and Product Design (Jonathon Ive) were in Singapore for one month during development personally approving each Cube part . CW3 stated that Riccio and Ive were constantly pressuring CW2, which is one of the reasons CW2 left Apple.

2 CW4 :

Employment and Job Responsibilities

CW4 worked as a Project Manager for one of Apple's third party manufacturer/developer of the Cube in Taiwan during Cube development . CW4 was responsible for the project management of plastic development for the Cube . CW4 coordinated the activities related to design and development of plastic parts . CW4 also participated in weekly staff meetings to review the Cube project.

G4 Cube Problems

At every major milestone of the Cube development process, Apple sent several industrial designers to Taiwan to review the Cube proj ect . Apple's visiting design teams would request changes after the product design was already frozen which caused serious tool manufacturing problems and project delays. Changes were also made at every step of the development process which caused further delays . According to CW4, the mold and knit lines were directly attributed to the changes made by Apple after the tools were completed and the Cube was ready to produce . CW4 noted that due to the increase in rejected parts, paper weights were made from the rejects and given to support staff.

CW5:

Employment and Job Responsibilitie s

CW5 worked for Apple for from 1991 to 2001 . From 1998 through the Class Period, CW5's position was Senior Project Design Manager based at Apple's Cupertino headquarters . During the Class Period, CW5 reported directly to Vice President of Design and Materials Projects Evan McCall. McCall reported directly to Senior Vice President of Hardware Engineering Rubinstein .

Design and Engineering Reporting at Appl e

CW5 reported that Apple was extremely focused on accurate and timely reporting of all substantive information regarding product development, engineering issues and production challenges . Every Senior Project Design Manager was required to submit two critical reports : the Project Status Report and the Project Risk and Opportunity Report . The Project Risk and Opportunity Report was the more important of the two reports, containing information about design challenges, results of component and raw materials testing and analysis and documentation of any unforeseen opportunities that could potentially enhance the project under development. The report was submitted as a word processing file and typically included attachments of various analytical and testing documents . CW5 submitted both reports for his/her projects electronically to Evan McCall, Apple's Vice President of Design and Materials Project . McCall consolidated the reports and forwarded them to Senior Vice President of Hardware Engineering Rubinstein . According to CW5 ,

3 CEO Jobs was copied on both reports and all other repo rts submitted by Apple's industri al design teams. The consolidated reports allowed Apple to monitor productivity, resource expenditures and progress of the design project versus the established schedule . The reports were standardized regardless of project and were all submitted at the same time by the various Project Managers .

According to CW5, Apple knew about the Cube's design and production problems through the Project Status and Project Risk and Opportunity Reports written by CW2 . Based on the importance of the Project Risk and Opportunity Reports and the fact that Jobs was copied on these reports, CW5 believed Jobs was aware of the G4 Cube problems early in the design process .

G4 Cube Problems

CW5 stated that Apple's Industrial Design Groups were actively trying to "rework" the tooling process for the G4 Cube during early to mid 2000 and were still trying to change the electrical and mechanical design tools when the Cube was initially released in August 2000 . CW5 recalled that Apple was not able to ramp Cube production to achieve maximum volume in 4Q00 . CW5 confirmed that Dan Riccio, Apple's Vice President of Industrial Design, was heavily involved in the tool design and development project, frequently traveling to the Far East to work directly with Apple's design and tooling partners . CW5 believed that Apple was not able to meet its internal industrial design specifications for the Cube's mold lines . CW5 discussed the issue with his/her colleagues during the spring and early summer 2000 and recalls the Cube design team was working to develop alternative production methods to eliminate the mold line imperfections . CW5 was told that acrylic material needed to be cooled before it could be injected consistently . These issues were discussed during regularly scheduled design and engineering meetings . According to CW5, "they were aware of it, no doubt . I think they were making every effort to reduce the mold lines because it was pretty obvious." Also, according to CW5, Jobs' insistence that the Cube be made from clear plastic (rather than dark plastic) made the imperfections more obvious .

Jobs also maintained a regular presence at Apple's Industrial Design campus in Cupertino. Jobs attended frequent meetings with the Industrial Design Group's senior staff and was given substantive presentations about the design, engineering and development challenges on all of the Company's products, including the G4 Cube . CW5 was told by CW2 and Evan McCall that several sample units of the G4 Cube were brought to the Industrial Design campus from Apple's primary production facility in Elk Grove, California. CW5 was also told by CW2 and McCall that the sample Cubes were evaluated and analyzed by designers and engineers and were then shown to Rubinstein . Based on discussions CW5 had with CW2 and other members of the Industrial Design Group, CW5 was aware that Jobs was personally shown sample units of the G4 Cube with cosmetic imperfections by Rubinstein, and perhaps Riccio . CW5 stated that both Rubinstein and Riccio personally dealt with Jobs on a frequent basis .

CW5 described a discussion with CW2, Lead Product Designer for the G4 Cube, which occurred in late June or early July 2000 during a lunch break at a project design manager's meeting . CW5, CW2 and one other person had the discussion at an off-campus restaurant . During the

4 discussion, CW2 disclosed that the G4 Cube project was having problems . CW2 stated that he/she was "really stressed out" about the problems and was "getting heat from the higher ups" to resolve the problems and "get it right" before the MacWorld Conference in July 2000 . CW5 recalls that one problem discussed was the heat injection process for the Cube. Given the importance of the Cube to Apple's product release at MacWorld, CW5 stated that Jobs and other senior executives would have known about CW2's difficulties . At MacWorld, CW5 recalled that Jobs ' presentations and dialogue were "a bit over the top" and "stretched reality ." CW5 stated that Apple was still dealing with customer complaints about the Cube case imperfections when CW5 left Apple in January 2001 .

CW6 :

Employment and Job Responsibilitie s

CW6 was Vice President of AppleCare Worldwide Service from 1999 through April 2000 . CW6 reported directly to Sina Tamaddon, Apple's Senior Vice President of Service and Support. CW6 was responsible for all post-sales support and functions and managing service providers .

K-12 Sales Transition

CW6 confirmed the failure of the K-12 sales force transition and attributed it to the loss of the independent agents' 20 year relationship with customers . According to CW6, he/she attended 50 meetings to discuss the new sales strategy. According to CW6, CEO Jobs and Senior Vice President of Worldwide Sales Mitchell Mandich discounted agents' customer relationships as a "trivial issue ." CW6 stated that it was "impossible" for Jobs and the entire executive staff to not know what was happening with K- 12 sales during 4Q00 because the Company had systems to track forecasts versus what actually "went out the door." For example, Apple generated "errors and misses" reports which detailed the variances between forecasted and actual education sales . CW6 believed the systems utilized were run on SAP . CW6 also noted that it was "impossible" for Jobs and his executive staff not to know about the negative effects of the sales force transition within the first month of implementation because Jobs held weekly "round table" meetings in Cupertino where all executives, including CFO Fred Anderson and Senior Vice Presidents Rubinstein, Nancy Heinen and Avadis Tevanian attended. CW6 noted that CFO Anderson and Controller Peter Oppenheimer would have been the first to realize the impact the change had on sales. Finally, CW6 described "RADAR," Apple's bug-tracking system, which logged, tracked and ranked known bugs . These bugs were reviewed in engineering meetings . According to CW6 Jobs was notified of all "Class A," bugs which were bugs considered to be "of line-stopping urgency." The bugs were tracked through RADAR 90-120 days after a product was released. CW6 also stated that the "Vantis" call center application would maintain case specific information .

5 CWT:

Employment and Key Job Responsibilities

CW7 was employed by Apple as a Campus Representative from May 2000 until May 2001 . He/she was the Company's representative at the University of Missouri -Columbia . For a brief period, CW7 was also the Campus Representative for the Columbia College of Missouri . CW7 worked part-time (typically 12 to 15 hours per week) for Apple during his/her final year as an undergraduate student. He/she was generally responsible for providing technical product information and training to students and university staff members that purchased and/or used Apple computers and peripheral products . CW7 was Apple's "resident contact" for staff and students at the University of Missouri and Columbia College. He/she provided students and staff members an immediate access to information and customer support for Apple products, technical information and consumer service. The witness was also available to assist customers with warranty and repair service needs .

CW7 typically communicated his/her daily activities to his/her supervisor via telephone or email and was required to update his/her supervisor, Laurie Coiclithero weekly . However, CW7 stated that he/she talked to his/her Apple account executive at least "two or three" times each week . Additionally, CW7 was required to submit a weekly update to Apple's Cupertino office . This weekly report documented the specific activities performed during the week and the total number of hours worked. CW7 stated that the weekly report was electronically submitted to the Company via a Campus Representative web site. Each Campus Representative was issued a password to access this web site . Campus reps would simply log-on to the web site, enter their password and file their weekly report. The report was automatically forwarded to the appropriate Apple account executive. The witness recalled that it took about 15 minutes to fill out and submit the weekly report . He/she confirmed that Coiclithero received the weekly reports from all campus reps under his/her supervision and that the reports were forwarded to James Marshall, Vice President of Educational Sales .

G4 Cube Product Problems

CW7 confirmed that the G4 Cube was fraught with several quality problems that he/she believed were a result of production challenges . He/she recalled that Apple was not able to solve these difficulties prior to the market release of the G4 Cube . CW7 confirmed that Apple's production difficulties resulted in numerous cosmetic defects to the case of the G4 Cube . The witness recalled that the case "blemishes" were obvious, and were easily noticed by potential customers. CW7 stated that the G4 Cube was a "black eye" for the Company . He/she believes the cosmetic imperfections cost Apple in sales. The witness received a G4 Cube to use as a demo in September 2000, which had several flaws along the side and top on the case . CW7 stated he/she received a non-defective Cube three weeks later.

CW7 also confirmed that demand for Apple computers was "not very strong" during his/her

6 tenure due in large part to Apple's premium pricing structures . For example, CW7 said that "after all was said and done," a typical G4 Cube purchase would cost approximately $2,000 . This made it very difficult for potential customers (e.g., college students) with limited financial resources to seriously consider Apple products.

The June 2000 "Boot Camp" for Campus Representative s

CW7 attended a June 2000 Campus Representative "boot camp" held in Cupertino . He/she stated that approximately 200 campus reps attended this boot camp for product and sales training. CW7 stated that Jobs gave a presentation during the week to discuss the Company's new products and services that were nearing market release . The G4 Cube was among the products addressed by Jobs. CW7 stated that Jobs, and at least one or two other individuals, addressed the quality and manufacturing problems with the G4 Cube .

CW8:

Employment and Key Job Responsibilities

CW8 worked for Apple from February 1999 through November 2001 as a Senior Global Supply Manager/Corporate Procurement Transportation and Logistics Manager . CW8 worked in the Transportation Finance Department (i.e., procurement), and was responsible for negotiating and setting up contracts to move freights from places such as Taiwan and Singapore to the United States . He/she worked with internal teams and outside vendors, such as air carriers and trucking companies, to ensure the shipments were moved from one place to another . CW8 described his/her job as being "strategic" as opposed to "tactical" and elaborated to say he/she was "looking down the pipeline" to ensure things were ahead of schedule .

G4 Cube

According to CW8, Apple was well aware of the cracks or molding lines in the casing of the G4 Cube prior to its introduction at the July 2000 MacWorld Conference . CW8 was certain these cosmetic issues surfaced before the G4 was introduced to the public since he/she did not know what the computer looked like prior to the MacWorld Conference and remembers he/she was anxious to see what Apple had made such a "big deal" about prior to release . CW8 believed the information on Cube problems was conveyed to him/her via email or letter . CW8 was confident high-ranking executives such as CEO Jobs, Senior Vice President of Worldwide Operations Tim Cook, and Senior Vice President of Hardware Engineering Rubinstein were well aware of this issue prior to the release date via corporate emails.

Moreover, having worked in the Procurement Department, CW8 stated that subsequent to the public release of the G4 Cube Apple debated whether to even ship the product because of the manufacturing obstacles, including flaws in the casing. During this time, Apple stopped production altogether for one to two weeks while changes were made to solve the mass production problems .

7 CW8 stated the product was on back-order and behind schedule by a "good month or so ."

Inventory Problem s

CW8 stated that Apple ran daily (and sometimes more than daily) reports documenting inventory-related issues. These reports were generated by the "Dell 4" system . He/she was certain "everything" was included in these reports, including, but not limited to : number of pieces of inventory Apple had on hand, where the product was being built, the lot and serial numbers of the inventory, where the inventory was being shipped, when it was being shipped, the release date of the product, and how much space was needed to store the inventory . Additionally, CW8 stated that forecasting reports were generated using a SAP program weeks before products were introduced and were distributed to the transportation group . He/she believed they were distributed online, as well as by hard copy.

CW9:

Employment and Key Job Responsibilitie s

Apple employed CW9 from August 1999 to February 2001 as a Frontline Technical Support Representative . CW9 was based at Apple's customer support facility in Elk Grove throughout his/her tenure. Generally, CW9 was responsible for providing responsive technical support to Apple's consumer and small business customers. Most of his/her work was performed either on the telephone or via written correspondence.

CW9 was responsible for fielding in-bound calls from consumer and small business customers . He/she typically worked a nine-hour shift, and handled between 45 and 60 calls per day . In general, these calls lasted approximately 15 minutes . For the most part, callers simply required clarification or explanation about the operation of their Apple machines, assistance in how to troubleshoot and/or correct minor problems, and how to return an Apple product requiring in-house diagnostic and repair work . CW9 was required to keep a daily call log. This log was filled out for every in-bound call he/she processed. The daily log was a detailed and concise journal of each customer call handled. The log listed the caller's name, the Apple product in question (listed as either product number or serial number), the nature of the caller's inquiry, how the inquiry was resolved, potential follow-up with the customer and the length of the call . The daily log was submitted to his/her supervisor Dave Thornton, Director of the Customer Support Center, at the end of each shift. CW9 also said his/her supervisor prepared a shift report that encapsulated daily activity of all frontline representatives . He/she believed this report was forwarded on to higher-ups . The importance of preparing the daily call log in a clear and complete manner was repeatedly emphasized to CW9 and his/her colleagues. Frontline representatives were subject to disciplinary action if they failed to complete and submit their call logs . Based on this, and on general comments made by his/her supervisor and other employees, CW9 believed the Company used the daily call logs to track customer response to products . He/she also believed the Company used these call logs as a way to monitor the nature and scope of various technical and quality issues.

8 G4 Cube and PowerMac Problem s

Almost immediately after the public release of the G4 Cube and PowerMac G4, the Frontline Technical Support team started receiving customer complaints regarding cosmetic flaws and the durability of the case of the G4 Cube . The witness recalled several customers complaining that the G4 Cube was too expensive to "look like a piece of crap ." Specifically, CW9 stated that the outer case of the G4 Cube was problematic in regard to design and functionality . CW9 also said the Company's innovative dual microprocessor (the "G4") did not perform as intended .

CW9 indicated that the first complaints started coming in immediately after the Cube was released increasing steadily through the fall . The witnesses stated that he/she personally handled 25 complaint calls per week related to cosmetic imperfections with the case of the G4 Cube.

In addition to the cosmetic and durability issues with the case, CW9 described other consumer complaints about the G4 Cube . Generally, these complaints centered on the location of the vent fan and the power switch. These witnesses received numerous calls from consumers complaining that they lost data when the machine either over-heated and shut down, or simply lost power for no apparent reason . CW9 believed the Company placed too much emphasis on "looks and style," and as a result compromised quality in regard to performance and versatility. He/she based his/her belief on his/her experience dealing with numerous disgruntled consumers who had purchased the G4 Cube.

With respect to performance, CW9 stated that the PowerMac failed because of its unique dual processor. He/she recalled that customers complained that the purportedly exceptionally fast processor was, in fact, very slow . Additionally, the dual processor was not easily expandable to meet the requirements of most technically savvy consumers .

The witness stated that Apple's senior executives, including defendant CEO Jobs were aware of the performance and cosmetic issues with the G4 Cube and PowerMac . CW9 based his/her statement in part on a memo he/she received in early August 2000 - sent to all frontline representatives and team supervisors - which acknowledged that the Company was aware of the problems with the G4 Cube and the PowerMac. CW9 stated it was "unusual" because, during his/her employment with Apple, he/she rarely received written notifications of product issues . The purpose of this memo was to advise employees of the problems, and to give direction/instructions on how to address the problems with consumers who called in to complain. CW9 also recalled that the memo advised employees to "expect" a larger number of calls from consumers regarding the G4 Cube case, and the power switch problem . The August 2000 memo also instructed employees on how to respond to consumers who requested replacement and/or refunds .

9 CW10:

Employment and Key Job Responsibilitie s

CW10 worked for Apple from September 1999 through January 2001 in the Elk Grove, California Call Center as a Customer Service Manager and was primarily responsible for managing call center supervisors, also known as Team Managers, and the technical support agents who assisted customers . The technical support agents assisted customers with consumer products covered under the initial 90-day warranty or through an extended warranty. CW 10 reported to Thornton, Director of the Customer Support Center, who in turn reported to the Director of the Austin, Texas and Elk Grove Call Center Chuck La Dow . According to the witness, the hierarchy continued in the following order: Director of the Austin/Elk Grove Call Center Jean Toulouse, Senior Vice President of Service and Support Tamaddon, and CEO Jobs .

G4 Cube Problems

According to CW 10, shortly after the introduction of the G4 Cube, the Elk Grove Call Center began receiving customer complaints regarding cracks and mold lines in the casing of the G4 Cube.' These complaints were internally classified as a "known issue," meaning Apple had received enough complaints to be fully aware of a problem and "anyone who had a reason to know, knew ." CW 10 stated that Jobs was "very heavily involved" and very "hands-on ."

CW10 reported that suggestions were available internally online on how to handle these specific complaints. According to CW 10, these online suggestions - such as identifying cosmetic case imperfections as lines in the molding as opposed to cracks and informing the customer that the computer was not defective - gave guidance on how to respond to consumer complaints .

CW11 :

Employment and Key Job Responsibilitie s

CW 11 worked for Apple from 1987 through 1996 and then again from 1998 through August 31, 2001 . As a Support Services Manager, CW11 was primarily responsible for managing the relationships between Apple and its service providers for retail and business channels, including : The Computer Store Northwest, West Wind, Elite Computers, Comp U Ware, Genetic, Nike, Livermore Labs, as well as others. CW 11 assisted providers with product-related service issues, which he/she described as being "difficult." For example, he/she was responsible for convincing resellers that the mail-in service required for the G4 Cube was the best way to handle repair issues.

2 According to CW10, complaints Apple received were documented in the customer's history, which is recorded against the serial number of the computer .

10 G4 Cube

CW II stated that there was a lack of availability when the G4 Cube was initially released to the public. He/she elaborated to say the initial orders for the product exceeded the available supply.

July 2000 MacWorld Conference

According to CW11, Apple was a very secretive company . For example, he/she worked at the July 2000 MacWorld Conference and did not know what was going to be introduced until just before the conference began . He/she explained that he/she was pulled into a booth just before the doors were opened and was given a "cheat sheet" on what was being announced and the details of each product.

G4 Cube Touch Switch Problems

According to CW11, the problem Apple was experiencing with the "hypersensitive" touch switch on the G4 Cube was a technology issue. He/she compared the switch to an elevator button that activates on its own and explained that when any form of electricity was passed over the switch - such as a metal pen or a hand - it would toggle the switch . The problem with the touch switch was "apparent very early on" by "early adopters" - the first individuals who purchase new products.

The repair strategy Apple implemented to correct the problem with the touch switch was referred to as "depot only," meaning customers had to box up their Cube and send it to Apple for repair. According to CW 11, customers were not "thrilled" about this since they were without their computers for over a week and dealers could not order the part ahead of schedule to shorten the turnaround time . The alternative strategy Apple implemented was to use a second generation switch for the units produced at a later date .

G4 Cube Casing Problems

The repair strategy Apple implemented to replace the defective Cube casing was also "depot only," again meaning customers had to box up their Cube and send it to Apple for repair .

G4 Dual Processo r

According to CW 11, Apple introduced the new PowerMacs at the MacWorld Conference in July 2000 when there was not enough software available to take advantage of both processors . He/she explained that without an application such as Adobe Photoshop , the operating system at the time, OS 9, did not and could not recognize both processors .' Furthermore, even with Adobe Photoshop, only certain affects of the application could be utilized . As a result, the new PowerMac s

According to CW 11, at the July 2000 MacWorld Conference, Jobs demonstrated the G4 Dual Processor using Abode Photoshop .

11 had very limited benefits to customers until OS X, an operating system that took advantage of both processors and could utilize the dual processors, was introduced . CW11 stated Apple anticipated the release of OS X to be within the same calendar year as the introduction of the new PowerMacs, but was late to the market by approximately one year.

Inventory-Related Issues

CW11 believed inventory problems were occurring during the Class Period because new iMacs began showing up in discount houses, such as Costco and Sam's Club, which was an action Apple had taken in the past to reduce excessive inventories .

CW12 :

Employment and Key Job Responsibilitie s

CW12 was associated with Apple from approximately February 1999 to February 2001 as a University Campus Representative while an undergraduate student at Tulane University . Although based at Tulane, CW 12 served as a Campus Representative for Loyola University/New Orleans and the Tulane University School of Medicine . The witness was responsible for promoting and selling Apple computers and ancillary products to individual students and various academic departments within these institutions.

CW12 reported to Account Executive Gary Dauphin . Dauphin, who was based in New Orleans, was responsible for all higher-educational customers in Mississippi, Alabama and Louisiana. Dauphin reported directly to the Director of Higher Education, who was based in Cupertino.

CW 12 was his/her clients' source for Apple technical and product information . The witness' key responsibility was to develop and maintain a relationship between the Company and the universities . CW12 met with and gave presentations to college deans and the chairs of various academic departments . He/she consulted with these individuals to determine the amount of financial grants each academic department received or was scheduled to receive for computer system purchases and/or upgrades . CW12's job was to suggest/promote Apple equipment as the best solution, based on the amount of available resources, for any university department that was expanding or upgrading their computer labs . CW12 worked with undergraduate departments, graduate and professional schools .

The witness was required to submit one weekly report to Dauphin via email . The report documented the number of hours worked, and a description of his/her precise activities . CW 12 also included the identity of all people contacted and the status of any pending requests for proposals . Every two weeks (on Monday), Dauphin would consolidate the Campus Representative's reports and forward them to his/her superiors in Cupertino . CW12 stated the reports were emailed to the Director of Higher Education and to the Vice President of Marketing.

12 G4 Cube Problems

CW12 confirmed that Apple had quality problems with the G4 Cube . He/she stated, "The Cube was definitely a dud product ." He/she stated that the problems with the G4 Cube cost the Company in terms of sales and consumer credibility. CW12 stated that between August and December 2000, approximately 12 to 15 G4 Cubes were sold between Tulane University, Loyola and the Tulane School of Medicine . As he/she recalled, nearly all of these were returned because of defects in the computer case. Although the computers were replaced, CW12 stated that the delay in providing replacements was "unacceptable ." He/she indicated that it took about three months to replace machines returned for quality problems . Based on this experience and comments made by Dauphin, CW12 believed the G4 Cube was improperly designed for mass production . The witness identified three specific problems central to the G4 Cube's failure . First, the durability of the case was a problem . CW12 stated that the case was "a real piece of crap" and subject to numerous cosmetic flaws that occurred in the manufacturing process . Second, the fan vent placement on the G4 Cube was poorly designed and installed in the computer . The witness stated that the fan vent was located on the top of the computer case and was subject to frequent power shut-offs. Finally, the G4 Cube was not really expandable in terms of speed and frequently used applications .

CW12 stated the Company "had to have known all along" about the various deficiencies because quality control and performance was discussed and emphasized on a regular basis . CW12 stated that the quality of Apple's products and the Company's quality control systems were used as sales tools in nearly all presentations he/she conducted. CW12 believed Apple released the G4 Cube before it was ready and was pushing the product early in an attempt to beat the competition.

CW12 stated that the G4 Cube quality problems became immediately apparent to the Company's Campus Representatives as well as potential customers . The witness stated that he/she received his/her G4 Cube computer in September 2000 . This demo computer was to be used for presentations and customer demonstrations. However, the case on CW12's machine was cracked and had two other manufacturing flaws . In its state, CW12 did not feel he/she could use it for demos, and communicated this concern to Dauphin . Unfortunately, he/she was told that the Company would not be able to immediately replace the machine . CW12 vaguely recalled Dauphin stating that the Company was aware of the problem and trying to fix it. Dauphin instructed CW 12 to use the defective G4 Cube for presentations, but to tell potential customers that his/her machine was just a demo and was not reflective of what the customer would receive .

CW12 used the defective Cube for a presentation he/she made to the staff at the Tulane School of Medicine in early October 2000 that turned out to be a "disaster ." CW12 recalled that very early in presentation, several people pointed out the crack in the case as well as the two other manufacturing flaws . Additionally, several individuals immediately commented about the placement of the vent fan and what would happen if a person placed anything on the top of the computer case . CW 12 also recalled "a lot of questions" regarding the expandability of the G4 Cube for medical and scientific research applications . The witness was not prepared to address the issues raised during this presentation. C W 12 recalls leaving the presentation with the impression most of the individual s

13 present were dissuaded in pursuing a G4 Cube purchase .

The June 2000 "Boot Camp" for Campus Representative s

CW12 confirmed that CEO Jobs and other senior Apple executives were aware of the quality and manufacturing problems with the G4 Cube by as early as June 2000 . He/she based this on comments made by Jobs and other executives at the June 2000 "boot camp" for all Campus Representatives . This "boot camp" is an annual training event held at the Cupertino corporate headquarters for new and returning Campus Representatives . This event takes place in late June (shortly after most colleges and universities start summer holidays), and lasts a full week. Approximately 200 to 225 Campus Representatives attended the June 2000 event . During the "boot camp" week, Campus Representatives are introduced to all new Apple products, given technical training, attend seminars and presentations on sales and marketing programs and attend meetings with their specific account executives . CW12 also stated that there is a daily lecture/presentation from senior managers from nearly all Company departments, including finance, human resources, engineering and manufacturing .

According to CW12, the highlight of the "boot camp" week was a speech by CEO Jobs . The witness recalled that Jobs' speech was on a Thursday afternoon, and lasted approximately 45 minutes. CW12 also recalled that Jobs acknowledged and disclosed some of the technical and manufacturing problems with the G4 Cube . Jobs told the audience that the problems would be resolved prior to the release . Based on Jobs' speech, it was clear to CW12 that Jobs and his/her executive team knew of the design and quality deficiencies before the July 2000 MacWorld Conference.

CW13 :

Employment and Key Job Responsibilities

CW 13 served as Apple's University Campus Representative at California State University at Fresno and Fresno Pacific University . He/she was assigned to Apple from May 1999 until August 2001 . CW 13, who was a part-time student, averaged about 25 hours per week . Among other things, CW 13 was responsible for conducting product demos and user training seminars . He/she also built and maintained Point-Of-Sale (POS) displays in the campus bookstores and assured that product brochures and technical fact sheets were available for students and university employees .

CW13 reported to Apple Account Executive Dave Brownstein, who reported to Val Greenlaw, Apple's Senior Director of Higher Education.

G4 Cube and PowerMac Product Problems

CW13 recalled a new product demonstration involving the G4 Cube, which he/she gave to the faculty and staff of Fresno State's College of Enginee ring and Computer Science. CW13's

14 presentation was poorly received by the members of the College of Engineering and Computer Science staff. The witness stated that there was "serious price resistance" to Apple's new and essentially "untested" computers. CW 13 confirmed that the outer casing for the G4 Cube was subject to various cosmetic flaws . The witness described several case imperfections he/she saw in some of the first G4 Cubes to arrive at Fresno State and Fresno Pacific University . He/she believed most of the early G4 Cubes sold at Fresno State and Fresno Pacific University arrived with cosmetic imperfections . CW13 remembered that he/she received his/her G4 Cube demo sometime around mid-September 2000 . He/she confirmed that his/her machine had three small imperfections in the case. Two of the flaws were on the front right side of the case, and the third was on the top, near the vent fan. CW13 called the Cube a "PR nightmare" for the Company.

CW13 agreed with statements made by other cooperating witnesses that the G4 Cube was not well designed for mass production .

CW13 stated that Apple's senior management knew about the quality issues and manufacturing challenges with the G4 Cube before the release to the marketplace . He/she based his/her statement on the "well known" fact that defendant Jobs was very involved in Apple's product development activities, and was made aware of production and engineering by his/her subordinates . CW 13 did not believe Jobs was being "completely straight" with MacWorld Conference attendees .

CW14:

Employment and Key Job Responsibilitie s

CW 14 worked for Apple from 1988 through September 2000, and reported to Director C .K. Haun. As a Senior Manager for the Developer Support Team, CW14 was primarily responsible for managing a team of development engineers, some of whom were located internationally, and for providing support and assistance to outside companies that were developing Apple products. He/she elaborated to say he/she primarily assisted the outside companies with software development issues and explained that concerns were typically associated with the comparison of Apple software to other products and how other companies were doing .

In CW 14's experience with new products, the Project Manager and small teams (AppleCare) consisting of five or six people met on a weekly basis to review the data received from quality assurance testing. These small teams made recommendations to larger teams of primary decision makers on how the project should continue. He/she stated the primary decision makers would include someone in a Senior Director position or possibly a Vice President . It was typical for a member of the team to outline what was on the agenda for the weekly meetings, including a review of the list of known bugs and concerns and new details or findings . Because of this, whether an outline was distributed ultimately came down to the style of the person conducting the meeting . He/she was certain an internal database named "RADAR" maintained the list of known bugs and product issues.

15 PowerMac Product Problems

CW 14 stated Apple's marketing department "glossed over and spun things " when promoting the product. He/she elaborated to state that the new PowerMacs had minimal adv antages for everyday applications because very few software products had been modified to take advantage of both processors . The introduction of the dual processor technology was thus a "catch 22" because people were not purchasing the product due to a lack of sufficient software , yet it was slow to be adopted by software developers because the product was not being purchased , which resulted in little or no returns for developers.

Prior to the release of the new PowerMacs an engineer on CW14's team "expressed disappointment several times" because the code for the dual processor was "slow to be developed and limited" in its capabilities . CW14 explained that the engineer was working with Apple employees and a third party- a small company consisting of one or two people - to code the product . CW 14 stated that there were two engineers on his/her team who had expressed concern over the new PowerMacs .

CW15 :

Employment and Key Job Responsibilities

CW 15 was employed by Apple for approximately three and half years. He/she was hired in July 1998 as a Retail Demonstration Representative . The witness generally worked part-time while attending college . During mid-semester and summer breaks, CW15 worked full-time for the Company. He/she was responsible for arranging, coordinating and conducting in-store Point-Of-Sale (POS) demonstrations for a variety of authorized Apple retailers/dealers . CW 15 conducted two to three demos on weekdays. These demo events usually lasted three to four hours . On the weekends, demo events lasted up to eight hours .

CW15 set up the demo area in stores and conducted the presentations . He/she arranged all display materials, assured that an ample supply of product literature was available and made sure all products were working properly . Ultimately, he/she showed and demonstrated the key features and benefits of Apple's computer and software products. The witness also showed and demonstrated some of the Company's ancillary products, including monitors and printers . CW15 was also available to answer questions for consumers and store sales employees .

Apple provided all display materials, literature and demo products . The witness set up the demo area, and conducted the event . At the conclusion of the demo event, CW 15 prepared an event report. This report documented the approximate number of consumers he/she talked with, the products most often demonstrated for consumers, any questions, problems or concerns with any product and if any follow-up by an account executive was warranted . The event report also included a section for the store manager/dealer to make any comments and to review the event . CW15 was required to submit this report to Apple headquarters in Cupertino within 48 hours of the event .

16 CW15 said the report could either be mailed or emailed . CW15 mailed his/her reports back to Apple's headquarters .

G4 Cube and PowerMac Problem s

According to CW 15, from September 2000 until immediately after the year-end holidays, the G4 Cube and PowerMac products were the key focus of Apple's demo events . He/she received demos of these computers in late August 2000, along with his/her September event schedule. As he/she recalled, the demo of the G4 Cube contained several imperfections in the case . CW15 did not ask for a replacement because time did not permit it prior to the start of his/her demo event schedule.

Initially, CW 15 stated that a lot of consumers came in during his/her demo events to look at the G4 Cube and PowerMac . He/she believed this was in response to Apple's heavy promotion of the products, and some "positive reviews" in various computer publications . However, CW15 noticed a drop in interest after consumers made a serious evaluation of the machines . CW 15 recalled numerous comments that the G4 Cube and PowerMac G4 were just too expensive. He/she remembered several comments made by consumers in which they basically questioned why Apple could charge premium prices for machines that were essentially no more technically advanced than competitor products on the market. CW 15 stated, "It didn't take long for people to figure out that they were paying through the nose for the appearance and design of the Cube ."

C W 15 recalled several critical comments about the dual processor installed in the higher end G4 Cubes and PowerMacs. He/she indicated that several people questioned the operating speed of the dual processor (believing it was too slow), and its compatibility with complex software applications required by sophisticated users .

CW16:

Employment and Key Job Responsibilitie s

CW16 was employed by Apple for approximately seven months beginning in late August 2000, as a Rework Technician and was based at Apple's facility in Elk Grove, and remained there throughout his/her brief tenure . CW16 was responsible for trouble-shooting computer systems . Specifically, he/she diagnosed and repaired faulty component parts for the iMac, the new upgraded PowerMac and the Company's new G4 Cube computer systems . CW 16's work included performing various "fail tests" on computers just off the production lines, as well as machines returned by consumers for repair/service needs .

Product Problems

CW 16 joined the Company just as the upgraded PowerMac and new G4 Cube systems were being released to the market. According to CW16, the number of G4 Cubes and PowerMac s

17 returned for service increased in September, October and November 2000 from the numbers he/she saw immediately after starting with the Company . CW16 remembered comments by fellow Service and Rework Technicians that the number of computer returns was "really up from the summer." Furthermore, the witness recalled several statements about CEO Jobs "putting the cart in front of the horse." He/she explained, "It seemed to me that the Company released the Cube and PowerMac before they were stable ." CW 16 also stated that the root cause of Apple's product problems was the fact that Apple "released" a lot of product before it was fully tested .

CW 16 confirmed that Apple was experiencing technical compatibility problems with the new dual processor chip used in the PowerMac systems immediately when he/she arrived in August 2000 . The processors did not operate effectively in a coordinated fashion . He/she explained that the dual processor was designed to run specialized software . This software would allow users to perform multiple functions, and a high rate of, or efficient speed . Unfortunately, as CW 16 pointed out, there was "some problem" that prevented the dual processors from performing certain functions without "knocking each other out."

The dual processor design flaws described above were a "real problem" for Apple . The Company was representing that the innovative dual processor design allowed users to operate in an extremely fast environment, but the exact opposite was true . The dual processor concept was slow to respond to user commands, and frequently shut down when performing multiple tasks . CW16 believes Apple's engineering and technical personnel knew full well of the significant problem with the dual processor. Based on his/her understanding of the Apple corporate reporting structure, CW16 was quite sure members of the senior management team were completely informed of the problems. CW 16 confirmed he/she was advised of the processor problems immediately upon j oining the Company in August 2000 . The dual processor problem was also evident in the top versions of the G4 Cube.

Based on CW16's experience with other products, test failures with the PowerMac and the G4 Cube were more "frequent" than normal . CW16 opined that Apple's number of component defects was "higher than it should have been ." He/she stated that "four or five in ten" computers manufactured by the Company had some kind of component failure .

CW 16 was also told that the workload had increased since the Company had released the upgraded PowerMac and he/she new G4 Cube system . He/she also recalled his/her colleague making a comment that it was always a struggle to maintain engineering and production schedules that met defendant CEO Jobs' "bravado ." Based on this conversation, numerous subsequent conversations with CW16's peers, and his/her own work experience, CW16 was convinced that Apple sacrificed effective quality control in order to release new products prematurely to meet release dates. He/she confirmed that the PowerMac and the new G4 Cube system had just been released when he/she first started in August 2000 .

18 CW17 :

Employment and Key Job Responsibilitie s

CW17 was actively involved in the technology and pricing decisions for the Boston Public Schools, Massachusetts . CW 17 participated in the administration of the technology content over the period of 1998 to 2001 . Unicorn Microage (Woonsocket, Rhode Island) was the Apple agent for the Boston School District. CW17 confirmed that there was tension between the school district IT departments (who wanted PCs) and the teachers (who wanted Apple products).

CW18 :

Employment and Key Job Responsibilitie s

CW 18 was the President of Holcombs, one of Apple's largest education agents . According to CW1 8, Holcombs registered its only annual loss in the year 2000 in over 127 years in business which was directly attributed to Apple's decision to drop the third party agent program for the K- 12 market. CW 18 referred to a small Catholic school in the Detroit area that ordered computers before the summer break and was depending on Holcombs to install and configure the systems . When they were ready for delivery in July, and found that Holcombs was not authorized to support their needs, they decided to move to the PC platforms .

CW18 stated that July through September is the most active quarter for Holcombs . CW18 felt that Apple committed a huge mistake by not waiting one quarter to make the switch to a direct sales model. The K-12 school administrators are not as sophisticated as the higher education administrators. The turn key solution provided by Holcombs was essential for the schools . When the agents program stopped many schools abandoned Apple . CW 18 felt that Apple underestimated how much hand holding the K- 1 2 schools needed . The educators were so upset that Holcombs could not continue to provide the Apple related sales and service, they decided to leave Apple . CW 18 felt that the teachers and administrators in the K-12 market were feeling the pressures by the school districts and parents to use Windows . When the agent program was stopped there was a backlash by the administrators. CW 18 stated without a doubt that Apple's elimination of the agent program accelerated the K-12 market shift to Windows-based PCs.

CW19:

Employment and Key Job Responsibilitie s

CW19 worked for Apple from September 1997 through June 2001 as a K-12 Education Account Executive . CW19 was responsible for selling Apple's product line to the 250 to 275 school districts.

19 K-12 School Sales Tracking

CW 19 stated that each school had a unique account number and when a purchase was made the account number was on the purchase order ("PO") . Schools sent POs directly to Apple via fax or mail . The account number was then used to track and report the revenue generated by each school for commission purposes and to compare forecasts to actual sales . Since account executives were paid commission on a monthly basis, CW 19 stated the report was generated on a monthly basis, but could be generated at any time .

Effects of K-12 Sales Force Transition

CW19 stated that revenue in his/her region decreased by 10%-12% annually during his/her employment with Apple including the Class Period . CW19 knew revenues decreased based on the information contained in the commission reports, cited above .

CW 19 stated that the sales force transition was a "slap to the face" for some schools . Schools felt as if they were not important since they were only able to communicate with Apple through an out of state telephone representative . The change caused confusion for customers and for the education organization . Customers did not know who to call since they used to have a specific third party agent. More importantly, the education organization was adjusting to the change during the time that the rest of the schools in the country were receiving their funds for the new school year . According to C W 19, almost every school in the country received their "budget money" for the new school year in July and thus, purchased computers between July and September. Since most schools received their funds for the new school year in July, CW19 stated the change was implemented at the wrong time .

CW20:

Employment and Key Job Responsibilitie s

CW20 was a sales manager for Holcombs, managing a group of sales agents selling to the schools in Michigan . CW20 would communicate directly with Mike Lorion, Apple's Vice President of Education and Mandich, Senior Vice President of Worldwide Sales . He/she started with Holcombs in September 1997 . He/she was terminated shortly after the end of Apple's agent program.

There was a serious difference between the sales offering of the third party agents and Apple representatives. The third party agents provided a turn key solution offering switches and hubs for routing data, printers and other third party peripherals, cameras and projectors, as well as third party software. The third party agents were able to open doors that Apple representatives could not . This was a great advantage for Apple, since in-house agents could only provide Apple products . The school boards, education districts and the schools looked at computer related purchases as a single item. Apple could not address this approach and needed third party agents . According to CW20, th e

20 change provided Apple's competitors the opportunity to move into the educational market. Dell offered a wide variety of solutions that are probably closer to what the schools need .

K-12 Agent Sales Tracking

Starting late 1997, early 1998 Apple started using the "TOOL" tracking database. Since it was such a big data file, the TOOL was transmitted in the form of a CD to the sales managers . The CD was password protected , allowing the sales managers to only see po rtions of the data relevant to the regions. The CD contained all types of sales history and contact information for each school and sales agent.

The sales managers would cut and paste sections from the CD into spreadsheets, and send the requests for updates to the local agents. Actual sales were reported by Apple from which the commissions for the agents were calculated . The agents provided Apple with sales forecasts for their specific customers. Once the updates were completed the agents would send the data to Apple who would update the CD. The sales information was reviewed at monthly meetings between the agents' management and the Apple representatives . The last year of the program was difficult; Apple reduced commissions from 3% to 1 .7% in 2000.

CW21 :

Employment and Key Job Responsibilitie s

CW21 was a former President and owner of a large Apple third party education agent from 1991 to June 2000 . He/she was also the acting sales manager in 1999 and 2000 .

The terms of the separation from Apple required the agent company to support the school customers until June 30, 2000, keeping the sales force intact . There was a period in which they could not announce the end of the program . The separation agreement which was sent to the agent company via letter, stated that if they did not meet the requirements of the separation they would lose the remaining compensation. All compensation would be paid 45 days after the end of 3Q00 . A big push was in force between April 15, 2000 through June 30, 2000 to close as much business as possible. There was no option but to comply with Apple's demands for the switch because they were being held hostage for their last commission check and the promise of future service business .

The information included in the third party agent's files was extremely detailed . As an example they compiled monthly spreadsheets for each salesperson that list each invoice generated by that salesperson. The information also included monthly or quarterly Apple sales compared to plan or actual from the prior year . The TOOL was a database started in 1998 of all educational customers, showing contact information and sales history as well as actual sales. It was mailed via CD-ROM containing spreadsheets .

21 CW22 :

Employment and Key Job Responsibilitie s

CW22 was employed with Holcombs as a K- 1 2 Education Account Executive, one of Apple's third party agents during the sales agent transition . According to CW22, the sales force transition failed . The main reason the program failed was due to the school's loss of personal relationships the agents built and the variety of third party hardware, software and services for configuring and implementing computer systems offered by the third party agents, but not by Apple .

By way of example, CW22 described a K-12 school in Romulus , Michigan that switched to PC as a direct result of the discontinuation of the third party agents program. Indeed, according to CW22, many schools were upset when Holcombs stopped their turn key solution. For the Detroit area there were over 20 people involved in suppo rting Apple's K-12 market which dropped to four after the transition .

CW23 :

Employment and Key Job Responsibilitie s

CW23 worked for Apple from 1987 through May 2001 as a Regional Sales Manager for the Northwest group - which included Washington, Oregon, Idaho, Montana, and Alaska . CW23 reported to Area Director Martha German, who in turn reported to the Vice President of Education . As a Regional Sales Manager, CW23 was responsible for managing sales representatives, account executives, marketing employees and sales for the K-12 schools in the Northwest .

CW23 stated field sales employees were able to track their individual sales on a web-based sales reporting system . He/she often sent these reports to the sales representatives on a weekly basis and received the reports from Apple's corporate office on a monthly basis .

CW24:

Employment and Key Job Responsibilities

CW24 worked for Apple from 1996 through March 2001 as a Customer Service Representative, a Strategic Market Sales Support Specialist, and as a Canadian Sales Support Specialist, which was his/her position during his/her last year of employment at Apple . As a Canadian Sales Support Specialist, CW24 was responsible for order entry, customer service calls, and education (K-12 and the university level) and reseller accounts for Canada .

Educational Market

According to CW24, subsequent to the change in the sales force there was "a lot o f

22 confusion," as most information regarding the change was "not filtered down" and was on a "need to know basis." For example, the sales department did not know how to explain the situation to customers who had worked with the independent third party agents for years ; Apple was only able to inform education customers which in-house sales agent had been assigned to assist them . CW24 further explained that there was a lot of loyalty involved and a lot of hostility from the independent agents - CW24 had daily contact with the independent agents and they were "not very happy" about the change. Additionally, some education customers were "put out" by the change because the independent agents were local to their area and the in-house agents were not as close or as easily accessible. Because of this, CW24 stated that education customers were "driven to PCs . "

Inventory Related Issues

CW24 stated that the shift in sales forces from independent agents to in-house agents was unsuccessful in part due to the newly introduced product line . He/she elaborated to say customers were not thrilled about the G4 Cube and that Apple had a backlog of iMacs . CW24 was aware of the backlog because he/she received a weekly update via email (she occasionally received a hard copy) which was called a "Weekly Product Allocation Report." This update reported the amount of inventory coming in and out to education and reseller accounts, which enabled CW24 to give customers an approximate delivery time . CW24 stated that based on these reports, delivery time during the Class Period was running six to eight weeks which indicated manufacturing was behind . According to CW24, employees in the inventory department who allocate the products to each product order generated the report . CW24 was sure everyone in sales support received the weekly update. Furthermore, he/she believed the reports reached high-ranking executives and that they saw the reports before anyone else .

Additionally, CW24 and his/her coworkers noticed fewer orders were being placed in 4Q00 and they were not as busy as the previous school year . According to CW24, Canadian and U .S schools are typically on the same schedule and as a result, Canadian and U .S . representatives were busy during the same period of time . CW24 stated the drop in sales was quite noticeable, dropping 20% during the Class Period. Furthermore, subsequent to the beginning of the school year - around October or November 2000 - Apple began having "back to school specials ." For example, if an educational customer purchased 10 iMacs they received a free server. CW24 stated that there was a significant increase in specials and incentives for educational customers during this time .

CW25:

Employment and Key Job Responsibilitie s

CW25 worked for Apple from 1997 until November 2000. In his/her last position at Apple, he/she worked as a Business Analyst responsible for revenue numbers of the retail business division for the U.S., which amounted to $142 million during the fiscal year ending September 2000 . Part ofhis/her job was to compare actual sales units and sales dollars against forecasted numbers . He/she also had knowledge of sales in Apple's educational market (including both higher education and K-

23 12).

Education Sales Forecasting and Tracking

CW25 confirmed that Mandich, Apple's Senior Vice President of Worldwide Sales and Philip Schiller, Apple's Vice President of Worldwide Product Marketing, prepared forecast numbers for each region. CW25 stated that he/she was sure that Mandich passed along these forecasts to CEO Jobs . CW25 stated that information on actual direct sales and education sales numbers was available to Apple in real-time through SAP . Salesmen in the field and people in corporate headquarters had access to this SAP system on a need-to-know basis . CW25 used this system to track sales expenses as well . CW25 stated that Apple moved to SAP specifically for its real-time tracking abilities .

CW26 :

Employment and Key Job Responsibilities

CW26 worked for Apple as a contract Test Engineer from June 2000 until February 2001 . His/her duties were to test both the software and hardware for the G4 Cube. CW26 stated that he/she tested the G4 Cube by installing software on the system and running previously defined test scripts.

CW26 stated that he/she reported to a project leader named Edde Wen . Wen reported to Saied Mostoff. Mostoff reported to Greg Paley . Paley reported to Rubinstein (Senior Vice President of Hardware Engineering) . Rubinstein reported to CEO Jobs .

G4 Cube Heat Problem

CW26 stated the G4 Cube had problems with heat throughout his/her employment with Apple. He/she stated that the G4 Cube would overheat if placed on its side or was in a closed or poorly ventilated room . CW26 reported an incident that occurred prior to release of the G4 Cube where a G4 Cube actually caught fire . The Test Engineer had simply turned on the machine and let it run for two hours . Two revisions of the Cube's internal motherboard were produced prior to final production and in each case modifications had been made to heat sinks to try to alleviate the heat problem. CW26 described these attempts as "band-aids" since the heat problem was not solved . CW26 also stated that pre-production testing of the Cube was performed using a metal case .

CW26 stated that it would have been impossible for upper management not to have known about this problem because everyone involved was talking about it . In addition, CW26 stated that management also had access to the RADAR bug tracking application . Every time that CW26 found a software or hardware bug, he/she would file a bug report using RADAR . He/she stated that the problem that caused the system to burn was definitely placed in RADAR .

24 CW27 :

Employment and Key Job Responsibilitie s

CW27 was an Apple Rework Technician from March 2000 until December 2000 . He/she reported to Eric Saragoza, Apple Computer Operations Supervisor . CW27 was responsible for correcting manufacturing problems with Apple products that had failed software or hardware diagnostics. CW27 reworked both iMac and G4 systems including the G4 Cube .

G4 Cube Problems

CW27 stated the G4 Cube had a series of problems . The chip on the motherboard that handled "Firewire" data transfers would produce too much heat . CW27 stated this was because the data rate of 400 Megabits per second would generate a lot of heat and there was no fan in the G4 Cube. CW27 was directed to replace the entire motherboard in hopes that the second motherboard of the same design would not have the problem . Eventually the entire motherboard had to be redesigned and the "Firewire" chip relocated to improve heat flows with the case . CW27 stated that the redesigned motherboard was available in October 2000 .

CW27 stated that the G4 Cube had another major problem shutting down without wa rning due to the on/off sensor. The Cubes that had shut down would not restart without being fully powered down. CW27 stated that it took until November 2000 for Apple to develop and implement an effective solution to the problem. That purported solution was to install a filter around the casing of the on/off sensor to make it less sensitive .

CW27 stated that the G4 Cube 's compact design also caused pinching of the IDE cable that connected the hard drive to the motherboard . Tests showed that the hard drives for these machines were not working properly. CW27 had to reopen the case and reposition the cable .

CW27 also stated that the Cube's network card pins would become bent during assembly, such that the network card would not work . CW27 would have to open the box, straighten the pins, and correctly insert the board in the system .

Shortage of Motherboards for the G4 Cub e

CW27 stated that Apple had a difficult time getting enough motherboards . CW27 stated that the shortage of motherboards caused a lot of people to "stand around" waiting for work . CW27 also stated that the shortage of motherboards caused Apple to frequently "break down" lines and reconfigure them to make other products, e.g., iMacs. CW27 stated that this process had to be reversed when working motherboards were available . CW27 said that they had to reconfigure a line once every month because of problems with the supply of motherboards . CW27 stated that the shortage of motherboards caused an employee to place the wrong motherboards in 30 machines before the error was caught.

25 CW27 stated that he/she was aware of the seam line in the case of G4 Cube . He/she said that the line was obvious, but that it was not considered a correctable error.

CW28:

Employment and Key Job Responsibilitie s

CW28 was a Manufacturing Associate for an Apple contractor from November 1999 through September 2000 working on the assembly line . CW28 worked on the entire G4 line of products including the G4 Cube . CW28 worked on the G4 Cubes from June 2000 (prior to the product announcement) until September 2000 .

G4 Cube Problems

CW28 stated that Apple had a continuous problem getting enough parts to build G4 Cubes . Every day he/she worked for Apple, he/she and every contractor that worked on the assembly line had to dial a special phone number to see if they should come to work . If parts had arrived as planned, the assemblers would stay at home . The most common problems for the G4s were getting enough motherboards and cases . It was common for CW28 to be ready to work on Monday, yet lack of parts would prevent him/her from starting until Thursday . CW28 stated that on the average, he/she and other assemblers missed about one week of work each month because ofparts shortages .4 All parts that were rejected by assemblers were routed to the rework people . Once "fixed" the reworked part was then replaced on the line at the proper point to continue the assembly process .

Lack of Incoming Inspection and Quality Contro l

CW28 stated that Apple did not have an effective quality inspection process for the Cube . CW28 recalled one instance when 500 G4 Cubes were defective and had to be reworked because th e cases were out of mechanical tolerance.

CW28 stated that quality control wasn't performed as a separate function until September 2000. This group worked on all product lines and focused on the appearance of the system and the mechanical alignment of the system parts . The quality control people would sample anywhere from one in five to one in ten of the final products . The prior method of inspection was that the person who placed the system in plastic and into a box for shipment was supposed to look at the system to see if it was "okay." CW28 stated this method didn't work because the machines were coming off the line to quickly to have a good look at the machine .

CW28 indicated that about once a month a special "rework " shift would be run to fi x

This translates to losing roughly 23% of manufacturing capacity due to parts shortages . There are 13 weeks per quarter and in each quarter there were three work weeks lost . Three divided by 13 = 23% .

26 problems with machines that had been ready to ship and were being stored in the warehouse. Every assembly line would be loaded with between 300 and 500 machines and the rework would be completed by the end of the shift . CW28 believed these machines had not come from customers, but that someone at the warehouse had "found errors" with the products that forced the rework .'

CW29:

Employment and Key Job Responsibilitie s

CW29 worked as a full time Test Engineer from 1998 until February 2002 . CW29 stated that he/she began testing the G4 Cube in April 2000 . CW29 stated that in his/her group, the G4 Cubes were tested without cases .

CW30 :

Employment and Key Job Responsibilitie s

CW30 was employed as a Rework Technician from late November 1999 until early January 2001 . CW30 was responsible for conducting various performance tests on Apple's computer products. CW30 conducted a series of operational tests, diagnosed particular performance problems and replaced/repaired any defective hardware components that caused the computers to malfunction . During his/her 14-month tenure, CW30 worked on several Apple computer products including the iMac, the G4 Cube and new PowerMac .

PowerMac Problem s

According to CW30, Apple experienced performance and technical problems with the G4 Cube and PowerMacs during his/her tenure . Based on discussions with his/her colleagues, CW30 believed the dual processor did not ultimately perform as the Company had anticipated . CW30 was told that the fundamental problem with the dual processor was related to a software compatibility issue. CW30 was also told that the dual processor was not stable when advanced software programs were run (operated) simultaneously .

CW30 stated that the recurrence ofproblems with the G4 Cube and PowerMac-G4 computers was related to the pressure the Company put on the assembly teams to get the products ready for initial public release. CW30 believed Apple's manufacturing and assembly teams were "rushed" to get the machines built, and likely "did not pay close attention to detail ." Based on CW30's understanding of the Company's reporting procedures, CW30 believed Apple's senior managemen t

CW28 stated the plan was for three shifts a day, five days a week, which amounts to about 65 planned shifts a month . The part problem reduced the number of actual shifts by 23% or 50 shifts. One shift divided by 50 shifts = 2% . Thus, this loss of production time due to special rework shifts indicates a loss of production capacity of approximately 2% .

27 team was briefed about the problems and production challenges with the G4 Cube casing .

CW31 :

Employment and Key Job Responsibilitie s

CW31 was the Business Unit Director for one of Apple's largest distributors from 1999 to June 2001 . As Business Unit Director, CW31 was responsible for $20 million per month of sales of Apple products for the Southwest region, supporting 230 accounts . Most of CW3l's accounts were in California with a few large accounts in Colorado and Utah . The customers were large and small value added resellers (VARs), integrators and solution providers.

Cube Supply Problems

CW31 confirmed that there was a severe shortage of Cubes in 4Q00 from the time it was introduced in August 2000 until well in 2001 . The G4 Cubes were on allocation and used as incentives for their customers to purchase more Apple products . For example, if the customer agreed to purchase an additional $1 million of Apple products they would be allowed to purchase a number of G4 Cubes as part of their order. There was a group at CW3l's company that allocated the products. The lack of supply of G4 Cubes sticks in CW31's mind, since he/she was trying to purchase a Cube for his/her son for Christmas 2000 and was unable to find one . CW31 even asked his/her contact at Apple, the account director for his/her company, but he/she could not supply a G4 Cube Christmas present .

CW32:

Employment and Key Job Responsibilitie s

CW32 was a Strategic Marketing Manager at the same distributor as CW31 from 1992 to 2001 . He/she distributed the G4 Cube to hundreds of Apple value added resellers (VARs) . CW32 stated that Apple does not have the infrastructure to sell to large numbers of end-users . CW32 confirmed that after the G4 Cube was released there were supply problems and it took several months for Apple to fill the pipeline, until the supply exceeded the demand . The Cubes were place on allocation for all of CW32's customers .

CW33 :

Employment and Key Job Responsibilities

CW33 was a Director of Product Management for the same distributor as CW31 and CW32. CW33 started in procurement and later moved to product m anagement dealing directly with Apple in both positions. CW33 was responsible for the Apple interface for product orders and customer service (returns).

28 Cube Supply Problems

CW33 reported that there was a dramatic shortage of Cubes for the first few months after the product introduction in August 2000. CW33 stated that Apple was unable to ship sufficient amounts of computers to meet the Christmas demand, some four months after the introduction . This shortage continued for a number of months and was the largest number of units backordered, exceeding any other product introduction CW33 could remember . The Cubes were on allocation. The decision as to which customer would be receiving Cubes was made jointly with Apple . In most cases, Apple would decide who would be getting the Cubes, how many were to be shipped and when .

CW34:

Employment and Key Job Responsibilitie s

CW34 was a Contact Center Quality Specialist for Apple from February 1993 until May 2001 . CW34's role was to assist in maintaining a high level of quality for customer support to Apple end-users. CW34 was working in the Contact Center when the G4 Cube was released and had exposure to the system .

CW34 reported to Rob Fedson in Austin who is the Contact Center Quality Manager . CW34 stated that Fedson reported to Mark Wilheshelm in Cupertino, who reported to Tamaddon, Senior Vice President of Service and Support. Tamaddon reports directly to Jobs .

Problems with the G4 Cub e

CW34 stated that the most frequent problem with the G4 Cube was that it would power off with no warning. CW34 stated that the problem stemmed from the power switch sensor that was too heat-sensitive. Apple eventually attempted to solve the problem by placing a gasket between the power switch and the case and make the sensor less sensitive .

CW34 stated that Apple customers also complained about the "cracks" in the case . CW34 stated that it was a common practice for Apple to replace defective cases for customers who complained.

Information Flow

According to CW34, only two people in tech support had any information on the Cube until one week prior to the product shipping. CW34 stated that Steve Jobs didn't want information getting out ahead of time . CW34 stated that all customer problems were placed in a third party call tracking system (Vantive) .

29 CW35:

Employment and Key Job Responsibilities

CW35 was employed by an Apple contractor as a Technical Suppo rt Representative from November 2000 until the end of August 2001 .

CW35 assisted technical support teams in need of help. CW35 also provided technical support to various product groups. He/she explained that Apple organized its technical support operations into teams that were responsible for specific Apple products . CW35's focus was to evaluate, identify and correct any operation/performance problems with computers retu rned for repair or replacement . Typically, CW35 worked on computers that had been returned to Apple by consumers.

Cube and PowerMac Problem s

Based on personal experience during his/her assignment with Apple, CW35 confirmed that the G4 Cube and PowerMac computers were problematic . Immediately after arriving at Apple, CW35's supervisor told CW35 that Apple was experiencing significant quality and performance problems with the G4 Cube and PowerMac . Subsequently, CW35 processed "a lot" of G4 Cubes and PowerMac-G4s for repair or replacement .

CW35 stated that Apple experienced both performance as well as cosmetic defects with the Cube and PowerMac. CW35 was told by his/her supervisor that Apple had "miscalculated" the readiness of the G4-Cube and upgraded PowerMac . CW35 stated that there was a "prevalent feeling" among Apple technical support personnel that the G4 Cube and PowerMac products were not ready for public release . CW35 also stated that Apple was not prepared for the extent of negative consumer reactions to these new computer products, and the corresponding number of G4 Cube and PowerMac returns in 4Q00 and beyond . This lack of preparedness presented Apple with several significant consumer service challenges . CW35 believed these challenges cost Apple credibility in the marketplace, and led to the ultimate demise of the G4 Cube and PowerMac computers . CW35 believed the Cube and PowerMacs were "rushed" to market before all the "kinks had been ironed out." He/she recalled being told by an Apple technical support representative shortly after starting work in November 2000, that the Company's design group and production department had encountered several significant problems in preparing the G4 Cube . He/she was told by the same person that shortly after the initial release of the G4 Cube and PowerMac-G4, Apple began receiving consumer complaints regarding the quality and performance of these products . He/she recalled several Apple employees telling him/her that there had been considerable pressure on the Company's design group and production department to get the new computers ready for release by the time of the annual MacWorld Conference .

According to CW35, there were three general reasons consumers returned G4 Cube and PowerMac to Apple : (1) imperfections or defects in the plastic case of the G4 Cube ; (2) internal

30 design and configuration of the Cube ; and (3) the operational performance of both the G4 Cube and PowerMac . Based on his/her personal observations and work on the G4 Cube, CW35 believed the "entire design was off," and as a result, the computer did not meet consumer expectations . For example, in addition to the imperfections and durability problems with the G4 Cube's outer case, the location of important internal components was problematic . CW35 stated that the power switch and the heat fan on the G4 Cube were poorly positioned . The defect frequently resulted in an unexpected loss of power, and/or a tendency for the computer to overheat if used for an extended period of time . CW35 repaired numerous G4 Cubes that had been returned because the power switch was defective and/or broken . CW35 stated that Apple used "weak" or "inappropriate" plastic materials to secure the power switch to the case of the G4 Cube . The materials caused the switch to turn itself off without any warning. CW35 confirmed that he/she attempted to replace defective power switches with a "bolt and bracket" that was far more stable that the original anchor piece used in the initial construction of the computer. The witness confirmed that Apple received numerous consumer complaints about lost data when the computer suddenly powered down without warning . This remained a problem through the majority of CW35's employment with Apple .

PowerMac Problems

CW35 confirmed that the dual processor did not perform as expected . As a result, CW35 stated that many consumers balked at purchasing the higher end Cubes and PowerMac computers because of limited performance of the dual processor . Based on customer complaints and response cards, CW35 stated the dual processor was functionally limited . According to CW35, numerous customers complained that the dual processor was very slow, and not easily expandable to meet the requirements of most consumers .

The Flow of Critical Information

CW35 stated that he/she received and reviewed many emails and "hard-copy" memorandums during his/her 10-month employment . CW35 stated the internal communications (emails and memos) were "very detailed" and that he/she received numerous written communications relating to the performance and quality problems with G4 Cube and PowerMac during his/her assignment. He/she recalled that many of these communications were distributed to engineering, design and consumer support departments . CW35 stated that defendant Jobs was copied on nearly all communications.

Further, in nearly all cases, CW35 stated that Apple's senior managers were copied on the important communications related to their specific area of responsibility . As such, CW35 stated that Apple's executive team, including Jobs, was aware of the performance and quality issues associated with the G4 Cube and PowerMac-G4 in late 2000 and beyond .

31 CW36:

Employment and Key Job Responsibilities

CW36 was the Senior Director of Higher Education from June 1998 until November 2000 . CW36 reported directly to Jobs.

K-12 Sales Tracking

CW36 stated that Mandich, Senior Vice President of Worldwide Sales and Schiller, Vice President of Worldwide Product Marketing were responsible for both units sold and sales revenue . Schiller was rewarded based on units sold and Mandich for revenue dollars . They would meet and agree on forecasts . According to CW36, Mandich provided the sales forecasts to CEO Jobs . CW36 believed that Jobs received actual sales results from CFO Anderson .

CW36 stated that the K-12 education revenues were "going in the toilet" during the Class Period and were eclipsed by higher education sales every month in 4Q00 . He/she based the statement upon actual revenue updates provided to CW36 weekly via an email message with an Excel Spreadsheet attachment from the office of Apple's Director of Educational Sales . The spreadsheet was called a "Sales Report," and included region, units sold, and revenue . CW36 stated that Mandich, Senior Vice President of Worldwide Sales was specifically named on the distribution list. CW36 also stated that updated education sales (including both K- 12 and higher education) were also available on-line.

CW37:

Employment and Key Job Responsibilities

CW37 joined Apple in May of 2000 as a Materials Manager and was directly responsible for all material planning and product issues involving the G4 product line, including the Cube . CW37 managed the worldwide material teams that supported the development, manufacturing and distribution of G4 products . CW37's responsibilities were to monitor the material status of products to ensure that the corporate financial goals were achieved . He/she left Apple in July 2001 the same time the G4 Cube was discontinued .

Management Reporting Structure

CW37 reported into Timothy D . Cook, Apple's Senior Vice President of Worldwide Sales and Operations who reports directly to CEO Jobs . Cook leads the global sales and operations organization that is responsible for the end-to-end management of Apple's supply chain, sales activities , and service and support in all markets and count ries . CW37 stated that Jobs met with Cook on a weekly basis to review the operations status of all G4 products .

32 Product Development Issues

It was general knowledge among the Cube team members that CEO Jobs was directly involved with the development of the Cube . Jobs was very vocal about how he wanted the Cube to look and work. Jobs was very excited about the Cube, and it became a large part of Jobs' life during the development phase . He worked one on one with the lead engineer and manufacturing coordinator during development.

The development laboratory was located on the main campus (One Infinite Loop, Cupertino, California). CW37 stated that Jobs visited the laboratory, at a minimum of once a week from May 2000 to August 2000 to personally review the progress of Cube development, at which Wayne Miller, Lead Product Designer and Bernie Trango, Lead Manufacturing Coordinator, provided current status updates on the project . CW37 personally observed Jobs in the Cube development lab on a "frequent" basis during that time . Trango's office was in the same building as the development laboratory. Trango confirmed that Jobs visited the laboratory to review the Cube during Cube development .

From the start of CW37's employment at Apple (May 2000 ), the Cube project was missing the development schedules. Because the holiday shopping season was approaching , the sense of urgency was ve ry high among all the team members. Trango reported to CW37 that Jobs became very upset and vocal concerning Cube development, and applied great pressure on the team leaders . Trango also reported to CW37 that Jobs had discussions with engineers during Cube development regarding Apple's problem producing plastic cases without mold lines or cracks . Jobs' emotional outbursts were frequent. Jobs' concerns and behavior were the major topics ofCW37's discussions with Trango. Jobs only dealt with the lead individuals on the project . Based on Jobs ' reported behavior and the development problems , CW3 7 reported that everyone involved with the project was very tense that the project was not on schedule. CW37 stated that the pressure was apparent when he/she arrived. CW37 received daily memos and emails regarding the development status of the Cube, prior to Cube release in August 2000 . CW37 stated that Jobs , Rubinstein and other executives were copied on the status repo rts and emails . CW37 also confirmed that Apple's development problem tracking system "RADAR" was used to repo rt and track all the Cube's problems. Once the product was released the supply problems began and CW37 became ve ry active in the project.

Post Development G4 Cube Supply Problem s

From the introduction of the Cube in August 2000 the plastic case was the major cause for the lack of Apple's ability to supply the G4 Cube System . The casing supply problem was the "pacing item" which delayed Cube introduction. CW37 confirmed that many changes were made to the Cube. The changes occurred during development and continued after the release . The changes were made to correct visual imperfections and hardware placements which were the major problems causing the Cube delay and supply issues .

33 CW37 reported that there were daily early morning material planning meetings involving worldwide participation from the manufacturing site in Singapore. The meetings started once the Cube was released to manufacturing (August 2000) . CW37 stated that the material supply was so erratic that it required daily meetings to coordinate the issues. Daily reports were generated detailing the production quantities and materials shortages and these reports were emailed to Cook . Jobs also attended meetings where the G4 material status (which was prepared by CW37 for Cook) was presented. Based on Jobs' active participation with the team leaders and the feedback CW37 was receiving from Trango, CW37 knew that Cook was keeping Jobs fully informed on all material supply issues .

Inventory Problem s

CW37 reported that between 3Q00 and 4Q00 Apple's finished goods inventory grew to 1 .5 times the normal four to six weeks supply . CW37 believed the education sales agent shift contributed to the increase of finished goods inventory .

CW37 stated that by the time Apple purpo rtedly solved the problems plaguing the Cube in 2001, there was a lack of demand for the product. CW37 was aware of the lack of demand because he/she was present at weekly (teleconference ) meetings with the sales managers from the different sales regions. CW37 confirmed that G4 Cube's sales numbers continued to decline throughout 2001 and the G4 Cube was eventually canceled in July 2001 .

CW38 :

Employment and Key Job Responsibilitie s

CW38 was an AppleCare Representative from July 1999 to July 2001 . CW38 was responsible for fielding and processing customer inquiries regarding performance and technical issues. CW38 diagnosed and analyzed hardware and software problems brought to the Company's attention by private consumers and/or commercial customers . CW38 also provided service and support to customers who purchased AppleCare products (e.g., extended warranties and technical support).

Product Problems

CW38 confirmed that Apple suffered from technical and performance problems with the G4 Cube and upgraded PowerMac. The Cube and PowerMac problems were the most prevalent during mid-2000. Specifically, CW38 identified the defective design of the power switch, as well as the cosmetic imperfections in the Cube case as having a significant impact on the viability of the computer. CW38 believed that these problems were apparent when the Cube was released in July 2000, ultimately dooming the Cube's potential.

CW38 corroborated statements by other witnesses indicating that Apple maintained

34 extremely tight controls on its product design and development efforts until immediately before a product's initial public release. As such, CW38 did not personally see the G4 Cube (or the new PowerMac) until late July 2000. He/she commented, "At Apple, everything was on a need to know basis. They were tighter than a drum . "

Immediately prior to public release of the G4 Cube and the new PowerMac in August 2000, CW38 became aware of the problems with the products . He/she recalled a memo generated from Senior Vice President of Hardware Engineering Rubinstein's office being distributed to AppleCare Representatives, as well as frontline customer support technicians that disclosed a detailed description of the problems with the G4 Cube power switch and the case imperfections. It also provided instructions and directions on how to process any consumer claims, complaints or questions . CW38 acknowledged that this memo made employees aware that there was a likelihood of complaints being lodged about the G4 Cube . CW38 believed the problem with the defective power switch was related to a faulty design for the port and switch anchor in the case of the G4 Cube. CW38 stated that Apple engineers designed a new anchor base (essentially an "0" ring) to purportedly correct the problem, but the defective power switch was not corrected until the end of 2000. CW38 stated that "several thousand" G4 Cubes were released and sold before the fix was made to the design.

CW3 8 stated that several other senior managers/executives were copied on the memo . Given Apple's track record of secrecy, the receipt of this memo prior to the release of the computers, struck CW3 8 as rather odd . The witness stated it was highly unusual for the Company to disclose any type of technical or production problems before the product "hit the street ." Based on CW38's understanding of the Company's procedures, and the substantive nature of the memo from Rubinstein's office, CW38 was convinced that Jobs and the other members of the Company's senior management team knew before the release of the G4 Cube and the PowerMac-G4, and perhaps prior to the MacWorld Conference that there were significant problems that would impact sales and customer reaction.

According to CW38, customer complaints began immediately after release and continued through the remainder of the year. CW38 was aware that the Company had a "real time" system in place to track and monitor all consumer communications (comments, complaints, etc .). CW38 believed this system was part of Apple's SAP database system .

CW39 :

Employment and Key Job Responsibilitie s

CW39 was employed by Apple for more than two years beginning in June 1998 through August 2000 . In late 1999, CW39 was promoted to the position of AppleCare Account Executive . CW39 reported to Regional Customer Service Manager Rick Ballestrazze . In turn, Ballestrazze reported to Senior Vice President of Service and Support Tamaddon . Tamaddon reported directly to defendant CEO Jobs . As an AppleCare Account Executive, CW39 focused on contacting and

35 establishing relationships with a number of "premier clients ." Most of these "premier clients" were medium to large corporate customers that purchased Apple equipment in quantity. It was CW39's job to call on these clients and to sell various AppleCare technical and support services .

Performance and Quality Issues with the G4 Cube

According to CW39, the lack of expandability was a critical failure with the G4 Cube . Although the G4 Cube was a "sexy" computer and garnered a lot of consumer attention early on, the witness believed many potential consumers simply walked away from actually making a purchase when they evaluated the "form factor" versus the computer's functionality .' CW39 commented, "As far as I am concerned, Steve really missed the boat with up-grade ability ." CW39 based his/her belief on informal conversations with several of his/her former colleagues as well as on his/her own personal opinions and observations regarding the G4 Cube .

CW39 was also aware of the case imperfections and performance deficiencies with the G4 Cube computer. He/she was told by several technical support representatives in the New Mexico Call Center that a number of customers were complaining that the case of the G4 Cube had cracks in it, and that some of these customers had returned the computers to the Company for repair or replacement. CW39 recalled seeing several of the G4 Cubes that had been returned around the end of September 2000. He/she recalled that nearly all of the defective G4 Cubes that he/she saw were returned because of the case imperfections and it was easy to locate the lines and imperfections in the G4 Cube cases .

Based on conversations with other Apple employees, CW39 knew that Apple had problems with the power switch on the G4 Cube. He/she was aware that customers had complained that the power button would get stuck, causing a loss of power . He/she recalled reading a memo in which someone in the design or engineering department admitted that the plastic port for the power button had not been properly bored out. He/she stated that the problem caused the button to slip from its anchor, which resulted in the power loss. He/she also stated that the problem was not permanently fixed by the end of 2000 .

G :\Cases-SF\Apple-01 \CMB80912 .e x

6 CW39 described the "form factor" of the G4 Cube as the actual physical makeup of the computer. Elements of a computer's "form factor" include the shape and size of the box, the number of slots for add-on cards (e.g., DVD drives), and capacity of the machine's hard drive .

36 EXHIBIT A (Hint: It's a computer.) A marvel of engineering. And economics.

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I- .-ipp(e Studio Display. l)" :1pple Studio DkpLtv' . 22" Apple Cinema DisplLtV-. ~l i~~ rl !('ll',lll~c'/ .fir/I!(1'rlt /i-!Nc'I7 /Itllrr>tlllt1 :u2O .A' -'iu 17't`I/Nr'l)',.1 i~~i'!l1r11 !Irll~rrlllt'I_ . rll.~l/; I' . ,''i~i / ' inn 1 ;i111'r)li L,l~'~ . ~?1• Ll' 1'c:~l;Iil /1(117 :7r.lC'lc rf/l i/i :,'IIu r .~ . i 'I'lir'ii- ;r . hf'iv71 f4 r'l.l .~- . .e ' ito/r(l ;hl!! ;?' :_'(ili ;7, vir . . ~;'.'~ ;111 ;'~iriiU-rlll s_` :cli'lilf'(li't'1'-'Il'll(IP)I= !li„' Vl/ l1~~11 ' I :C c ~trl1 "'ii<'h-rill ~ ) ll// n,

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lit Actually, it's a supercomputer.

Presenting the Power Mac" G4 Cube: a supercomputer miraculously engineered into an eight-inch cube, and suspended in a stunning crystal- clear enclosure . Though it's less than one quarter the size of most PCs, the G4 Cube delivers far greater performance. Its G4 processor, with built-in Velocity Engine ; reaches supercomputer speeds of over three billion calculations per second - humbling even the fastest Pentium III: And giving you more than enough power for the most demanding uses, from desktop publishing to desktop movies, from playing ultra-realistic 3D games to playing DVD movies . Amazingly, we figured out how to cool this enormous G4 power without a fan, making this one of the quietest computers ever built . Running in virtual silence, the G4 Cube doesn't distract you from more important things - like thinking. Its also the first computer to come standard with an optical mouse, for perfect precision on almost any surface. As well as a pair of Apple-designed Harman Kardon stereo speakers that bring high-fidelity sound to your movies, music and games. And it connects to your choice of Apple's flat-screen or CRT displays in equally stunning designs . True, it looks like it belongs in the Museum of Modern Art. But the G4 Cube is really a thoroughbred supercomputer that belongs right on your desk . So much technolc

Never has so much technology been engineered into Such a small space. The remarkable G4 Cube, measuring less than eight inches per side, delivers more computing power than PCs four times its size . While it took enormous effort to get all this i advanced technology into the G4 Cube, it takes very little effort to get it out. Simply turn the cube

v • j the new /7-inch . Ipple S7rrrlio Displ(n - assturritingh' clesi,raec! as the G4- Cube itself With a flat Dicrmondtron' CRT. built-in Color/ync" to maintain true colons. two CM ports and Theater,Ifoc%.%r• more cirrenralic DID r.ierring.

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71)e64 Cube is powered hr a 1504/H_ GI chip. rc/tb built-irt Velocih, Ermine. u /bicb reaches : upercomprr/er speeds o1 more that three billion calculations per second'ibree giaajlopsL. .ic,rout! sure valuable lime rrberr .rrorr apply pou•e;-hun,:rr Photoshop ; illers. render video effects and rip .VP3files . )gy. So little space.

over, pop up the built-in handle and lift out the electronics as a single unit. Now you can access major components, expand memory up to 1.5GB or install Apple's AirPort'" wireless networking . Or, you could just pause to admire the technical beauty of a supercomputer that actually fits in an k eight-inch cube.

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Farewell. inousepac/. The 64 Cube conies standard with an optical mouse (an industry jirsi)Jor peifct precision on almost c»rt' .,rr~ fine. A%here;+ the button? The enure slrilice is a button - ergonomically designed so .you ccur rest roes finger rcberever its most coinfa•labl e 1 4111~IIIIIIIU a

The G4 Cube is in eniouslr engineered lo be cooler/ n•it/jou/ cc fcru. .Vo/ an ecrs_t' fecrl. considering the massive power «ncl storage ljousecl willhiu. Cooled br the crir•/lowing naturally (cu/ .iilent!1') through its cculer cG«une% it rZ«IS ilr virtual silence -- making it one c uie/e.rt corn/)Inters e,'er built.

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The neu' /O8-ket• pro kcerho«rc/ (cri/h 15Jrnrction kem audio r'olurne «rr(/ disc-eject keys) has a GSB por•! on each .cicle. So 1-011 can plug rorn• mouse into the right or le%t ,ic/c rY'the kc_t Gnnrrl. am! still hare a port to plug in Your digital camera. Palm or other LJB device.

The .177 R,IGE 128 Pro graphics accelerator is the f tslesl graphic's engine ever Gtri(l into a .bl«c. It delivers .strper%«sl 2D im( gin to speed( vont through sopl) istic«le(l,,r(Ipl)ics applications. and accelerated .31) rendering./or bear•t- /Gerrtrpilw. 4/dike acliou in the most crdr errrcec / .3D ,jams.

Noll . roll G«1-i ei choice in Super -/Gin c/u lrrt :~ The breathl«king ??-inch . The .source o% «1/ pnrr•er A sin,tile unit,% u'er:c ercr;- lelterbo.r /tonal .Ipple Cinema Displtiv' G« a companion : /he /5-irrclr component o% /!he stslem . inc/nc/m , the Cu Cube. apple :Ipple Studio Displrrn. Both deliver srrperbrigh1. all-u gi/al. clis/or tio ;-free c/isplen• reven the CRT c pl«t•/ . stere(, speakers' and mmrr images. it-ill) no cid ui/nie is necessarr - ever And both /ecr/rn•e tan built- 1 ;i13 and FirelrIre pe ripber als. So t ou can in (ural' Trill) ill ( :cB p1-» •ts%;n• courrnien/ conned/in,, ny,kc 'bca •c/,mcl peripbe;'ais. The usual /«u (e of cables. _IC crc/dplers :u,aIlion er .c/ri/i< . In elecrant .clot-loading DID chive is located oil lop of the Gl Cithe /or easy access. So uhen ;'ou handle CDs or DI,Ds. lberec no need to reach 1111der• rottr• desk. - the clt•it•e is r•i,;hht there on .i'our desktop.

Expand/n,, the G4 Cube is as east as plcr., fring in a L'SB. Fireli ir•e or Ether net cable. I hu can plug into a school or office neht•ork. Or connect to a cable or DSL modem (or use the built-in 56K* 190 mo(tem). Or add all kinds o/periphetrils. like hard (loves. CD-RII"' and Zip drires. .,rmtlrers. printer;s. digital cameras and calltcorders.

The per.%ct neht•o1•k has Ito «•i,'ec al all 775crt c tr•lrt- the G•i TC 7 cube contcc tecrdt fot' :Ipples :lirPntl wireless ttettmr•kint,,. Just add an . iit•Por•t card and you can connect to the Inter net - without «•ires - through an optiolurl :lirPotY Base ,Slaliolr up to 150 f eet cttrm .

The peufixt Inov e-maker : Connect irour• digital camcorder using Fit•ePre. then Iaunch :I/)pleS eilna:/ng Llloiie•so,/lware (itrcluclecl) to instcutllt' make mot•ies . Or add Fined Cut Pro so//ware to hate ct complete. pro-tlualih• video editing studio . right on . oltr• desk.

The G4 Cube comes it-ill) a set o%.,Icnlltiu, :Ipp/e desi~Jrter/ Harman Kart/on stereo speakers. (Ir/t•ell hl' a stale-0/-the- flow Inew') cords (lot's it lake to connect it c/isp/it ; . Ir; h the (741 Cube cart digital tunpli/ier•fa• the highest /idelih•. :IIu(llher*r•e and one of:Ipple's near matchin clicplais. only one. .-I single cable powered from the G•4 Cube. so thetek no :ICadapter r•equir•ed curries not only r•icieo. hcti porter cmd the L SB s ivial Its ct•eN.

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r `'" . t " y •, ` ti.. t w_ E. r. . 4 k.. v .. .. i .. EXHIBIT B DECLARATION OF SCOTT D . HAKALA J

1 . My name is Dr . Scott D. Hakala. I am over the age of eighteen (18), of sound mind , and am fully competent to make this declaration . I have personal knowledge of the matters listed below, which are true and correct :

Qualifications

2. I am a principal at Business Valuation Services ("BVS"), a national busines s valuation and consulting firm that operates as a wholly owned subsidiary of Century Business

Services, Inc., a publicly traded business services firm (Nasdaq : CBIZ). I have been employed by

BVS for over nine years. BVS has offices in Dallas, San Diego, and Los Angeles and is comprise d of approximately fifteen individuals providing business valuation services to public and privat e companies .

3 . I received a doctor of philosophy degree in economics and a bachelor's degree in economics from the University of Minnesota . I earned the professional designation Chartered

Financial Analyst (CFA), awarded by the Association for Investment Management and Research . 1 have also studied statistics at the doctorate level. In addition, I have served as a consultant an d expert witness on numerous occasions regarding economic issues similar to those in this litigation , including the valuation of executive stock options and insider trading . I have prepared analyses and testified a number of times in both class action shareholder lawsuits relating to accountin g misstatements and relating to valuation issues. A detailed summary of my qualifications, includin g prior testimony and publications, is provided on the curriculum vitae attached hereto as Exhibit A .

4. My compensation for this assignment is based on a billing rate of $325 per hour. I received limited assistance from other employees of BVS .

5 . I was asked by counsel for plaintiffsin this case to determine whether sales of Apple

DECLARATION OF SCOTT D . HAKALA - I - Computer, Inc . ("Apple") common stock by the Apple insiders (the "Insider Sales") were statisticall y associated with subsequent Apple stock price movements reflecting information about Apple disclosed to investors after the Insider Sales had occurred. In other words, were the Insider Sale s independent of the adverse disclosures alleged in the complaint? My analysis showed only a remot e

chance - with odds ofgreater than one hundred to one against - that the benefits captured by the

Insider Sales occurred by chance alone, independent of the insiders' possession and use of material ,

adverse non-public information.

6 . In connection with this assignment I have received and reviewed the followin g

information:

(a) The complaint in this matter ;

(b) CDA/Investnet compilations and/or SEC Form 4 filings showing the dates,

numbers and proceeds of Apple shares sold by the Apple insiders in the period January 1997 to June

2001 ;

(c) Form 10-K (Annual Reports) and Proxy Statements to Shareholders filed b y

Apple between 1997 and 2001 ; and

(d) Market return indices for the S&P 500 Index (SPX), the NASDAQ Composit e

Index (CCMP), the Amex Computer Technology Index (XCI) and for individual companies engaged

in computer-related indust ries (ticker symbols: Intel (INTC), Compaq (CPQ), Hewlett -Packard

(HWP), Motorola (MOT), IBM (IBM), Microsoft (MSFT), Texas Instruments (TXI), Gateway

Computers (GTW), Dell Computers (DELL) and Sun Microsystems (SUNW)) .

Summary of Conclusions

7. My conclusions to date are based in pa rt on my statistical analysis of Apple's stock

DECLARATION OF SCOTT D . HAKALA -2- price movements. To analyze the issue of statistical association, I applied a statistical test t o determine whether Apple-specific stock price movements (after accounting for market-wid e movements) in a test period after the Insider Sales were within the range of normal price variation exhibited by Apple stock in an estimation period from January 3, 1995, to June 30, 2000, before th e

Insider Sales . The specific regression was based on quarterly (63 trade days) movements in Apple' s stock price relative to two market indexes, CCMP and XCI . My calculations for the post-Insider-

Sales test period revealed a highly statistically significant departure (p-value less than .01, with corresponding confidence level greater than 99 percent) from such normal price movements . In other words, my analysis shows only a remote chance - with odds of greater than one hundred to on e against - that the benefits captured by the insiders' sales occurred by chance alone, independent o f the possession and use of material, adverse non-public information . Based on this analysis, I hav e concluded that the Insider Sales as a whole and individually were not independent of advers e information subsequently revealed to investors and incorporated into Apple's stock price .

8 . I also analyzed Apple-specific stock price movements at the disclosure of advers e information on September 29, 2000 . I found a statistically significant decline in Apple's stock pric e relative to the market index suggested by the regression analysis I conducted. The T-statistic, as a measure of significance, for the single date of the disclosure was -21 . 96, indicating greater than a

99.99% degree of confidence that the decline in Apple's stock price associated with the disclosure a t the end of the plaintiffs proposed class period was not by chance and causally related to th e disclosure by Apple. To examine the persistence, I considered the quarterly (63 trade days) abnorma l returns exhibited by Apple's stock relative to the regression analysis for the Insider Sales. The statistics indicate that there is greater than a 99% probability that the Insider Sales that occurre d

DECLARATION OF SCOTT D. HAKALA -3- during the proposed class period were undertaken to avoid a loss . Exhibit B provides a graphical illustration that the quarterly returns exhibited as a result of disclosures on September 29, 2000 , meant that Apple shares were inflated in value by a statistically significant amount during th e proposed class period . (Generally, the statistical significance is seen in the T-statistic consistentl y less than -1 .96 for quarterly returns prior to September 29, 2000 .) Exhibit C provides the cumulative abnormal returns to Apple shareholders throughout 2000 . Exhibit C presents the relative losse s suffered by Apple shareholders as a result of the disclosures at the end of the proposed class period .

Scientific Basis for Conclusions

9. My analysis rests on the same analytical foundation as the body of method s commonly known among accounting, finance, and economics academics and professionals as "even t studies."' These methods are firmly established in the empirical financial economics literature and widely used in professional and academic research on stock price behavior . The use of event studie s and abnormal returns to study insider trades has a long history in the academic literature.

10. I used the estimation period data from January 3, 1995, to June 30, 2000, to analyze the association of Apple's stock price movements with general market movements, in order to isolate

Apple-specific price movements (including those associated with Apple-specific disclosures) . This is a widely used, well accepted method of controlling for market-wide changes . I then examined the distribution of Apple-specific price movements in the test period for consistency with the distributio n of Apple-specific price movements in the estimation period . In other words, I tested to determine

` See, for example , Campbell, J.Y., Lo, A.W., and Mackinlay, A .C ., "Chapter 4 : Event- Study Analysis," The Econometrics of Financial Markets, 1997, pp. 149-180.

DECLARATION OF SCOTT D . HAKALA -4- whether the test-period stock price movements were out-of-the-ordinary. If the Insider Sales were independent of Apple disclosures and Apple-specific price movements, then the subsequent price movements would be independent of the Insider Sales and statistically indistinguishable from price movements outside the test period . However, my analysis as outlined below demonstrated not independence but, instead, a positive association of insider trading with subsequent adverse disclosures, consistent with the possession and use of insider information.

11 . For my analysis, I converted Apple stock price movements during the estimation an d test periods into stock "returns," i.e., percentage changes from the close of one trading day to the next. I then used the "market model" to partition Apple's returns into a component associated wit h general market movements and an Apple-specific component, the so-called "abnormal return" t o

Apple stock. An abnormal return reflects the positive or negative movements of Apple stock not explained by the effects of general market movements .

12. Each Insider Sales date marks the start of a series of abnormal returns that can be use d for a test of the "null hypothesis" of independence . I calculated a single, aggregate measure o f cumulative, post-Insider-Sales abnormal returns by combining the distinct series of post-Insider-

Sales abnormal returns into the single series of abnormal returns to the value-weighted Insider Sale s

"portfolio" in "event time" (i.e., all translated to a hypothetical, single start date). In other words, I calculated the performance of Apple stock relative to the market after each insider's sales . For my statistical test I measured the cumulative abnormal return ("CAR") performance of this Insider Sale s

"portfolio" during the six months of event time after the sale date.

13. I measured the "statistical significance" of the actual post-Insider-Sales CA R performance of Apple stock by comparing it to the range of values that could occur if the distributio n

DECLARATION OF SCOTT D. HAKALA -5- of post-Insider-Sales abnormal returns were, in fact, the same as the distribution of Apple abnormal returns generally (as approximated by abnormal returns in the estimation period) . These calculations showed that the actual post-Insider-Sales CAR performance of Apple stock was extremely unlikely to have occurred by chance alone, i. e., that the association between the Insider Sales and subsequent

Apple-specific stock price movements was highly statistically significant . Based on this analysis, I have concluded that the Insider Sales were not independent of adverse information subsequently revealed to investors and impounded into Apple's stock price .

14. I further considered the amount of shares sold and the exercise of stock options by the insiders in the subject case . The amount of shares sold relative to holdings, as measured by the value of stock options and shares held, was unusual in amount and percentage for the individuals identifie d in the Complaint (Heinen, Tevanian and Tamaddon) . Premature sales of stock options are non- optimal, except for limited periodic sales for diversification purposes. In this instance, the amount and consistency of sales during the class period was strongly suggestive of a peak in the price of

Apple shares and a likely drop in relative value of Apple shares in the future .

15. The vast majority of the options held by Steven P . Jobs were at strike prices ($43 .594 per split adjusted share) that made exercise of those options unattractive during the period of study .

Had he exercised those stock options in August or September 2000, he would have sacrificed a one- year excess expected return (assuming the market was well informed) of at least 48%. This analysis considered the implied volatility for Apple call options and the current risk-free interest rate for options with greater than nine years remaining to expiration . Thus, a reasonable investor, even believing that the current shares of Apple were inflated in value, would not have exercised th e options held by Steven P . Jobs.

DECLARATION OF SCO TT D. HAKALA -6- I

16. 1 also analyzed the abnormal return associated with a-specific disclosure of advers e

information on September 29, 2000. This abnormal return measures the Apple-specific stock price

effect, if any, of the disclosure . I applied a standard statistical test to this abnormal return and found

that it was statistically significant. Based on this analysis I concluded that the stock price drop at thi s

disclosure could not be attributed to chance alone, i.e., that the drop was associated with the

disclosure .

17 . In short, my analysis shows that the chances are remote - with odds of greater than

one hundred to one against - that the abnormal returns to the Insider Sales occurred by chance alone ,

independent of the insiders' possession and use of material, adverse non-public information disclosed

in September 2000, i.e., inside information about Apple as described in the complaint .

18 . I may do additional work . In particular, I may refine or extend these calculations if I

receive additional information .

I declare under penalty of perjury under the laws of the State of California that the foregoin g

is true and correct . If called as a witness , I could and would competently testify thereto Executed this Uday of 4,,:.- , 2002, at Dallas, Texas.

DR. SCOTT D. HAKALA

DECLARATION OF SCOTT D. HAKALA -7- Exhibit A Exhibit A

Scott D. Hakala, Ph.D., CFA

Employment History

• 1992 - Jan 1998, March 1998 to Present Business Valuation Services, Dallas, Texas

Principal. As a financial economist, Dr . Hakala brings to the firm extensive practical knowledge of finance, economics and statistics . His special expertise includes: corporate finance, restructuring and cost of capital ; interest rates and inflation, economic cycles and trends, fiscal policy and monetary policy in macroeconomics; wage and compensation determination in labor theory; foreign exchange rate movements, international trade and capital flows, foreign exchange risk and hedging strategies, trade policy and transfer pricing in international finance; derivative securities in finance ; and antitrust and industry structure, strategic pricing and marketing, cost and production analysis in microeconomics .

• Jan 1998 - March 1998 Laser BioTherapy, Inc ., Dallas, Texas

Interim President. Dr. Hakala served as the Chief Executive Officer of Laser BioTherapy, Inc . The company is in the development stage and is in the process of seeking approval from the U.S. FDA for commercial marketing of a non-invasive, therapeutic laser device . His decision- making authority involving issues of marketing, employment, negotiating with investors, pricing, product planning, financial planning and all other corporate decisions .

• 1988 - 1992 Dept. of Economics, Southern Methodist University, Dallas, Texas

Assistant Professor. Dr. Hakala taught Ph.D., M.A. and B.A. courses in macroeconomics, monetary/financial economics, financial institution regulation and international financial management. He supervised dissertations on international money, commodity options and forward markets, and foreign exchange rates . His research interests included monetary policy, the demand for money, the causes of fluctuations in employment and output, capital stock estimation, aggregate production theory, foreign currency movements (futures, options and forward contracts), inflation, interest rate movements and the term structure of interest rates, asset pricing and consumption.

1983 - 1988 Dept. of Economics, University of Minnesota, Minneapolis, Minnesota

Lecturer. Dr. Hakala designed course materials and taught large classes in macroeconomics and international economics . He served on hiring committees and evaluated other instructors .

Debate and Speech Coach for Eight Years . Dr. Hakala recruited and trained high school students and maintained budgets. He produced two State Debate Champions , qualified teams for the National Debate Tournament and produced a top-ten , nationally ranked debate team .

Scott D. Hakala Page 1 Exhibit A Formal Education

Doctor of Philosophy, Economics - 1989 University of Minnesota, Minneapolis, Minnesota Graduate School Fellowship

• Bachelor of Arts, Economics - 1983 Minor in Business Administration and Pre-Law Emphasis University of Minnesota, Duluth, Minnesota Graduated Summa Cum Laude Whiteside Scholarship, full tuition and expense s

Honors and Awards

. Distinguished Instructor, Department of Economics, University of Minnesota, 1987-198 8

• Earhart Foundation Award, 198 5

• Graduate School Fellowship, 1983 and 198 4

• Cecil H. Meyers Outstanding Economics Student Award, 198 2

• Perfect Scores on Quantitative Analysis and Verbal Analysis sections of Graduate Record Examination (GRE), 1982

. Alice Touhy Tweed Award, High School Valedictorian, 197 9

Lee Krough Award (outstanding character), American Legion's Minnesota Boy's State, 1978, elected Lt. Governor and invited to represent state at other event s

• Centrum Award, 1979 (for outstanding character and cont ributions)

• Sons of the American Revolution Award, 1976 (citizenship and character )

Professional Association s

• CFA Charter, The Institute of Chartered Financial Analysts, completed all tests and requirements for a CFA designation

. Member, Association for Investment Management & Research (AIMR )

Publications

"Estimating and Applying Economic Value Added," Chapter 13E - Financial Valuation: Businesses and Business Interests - 1998 Update. Publisher: Warren, Gorham & Lamont

Scott D. Hakala Page 2 Exhibit A

"Valuation for Smaller Capitalization Companies" (with Dr . Mukesh Bajaj), Chapter 12A - Financial Valuation : Businesses and Business Interests - 1998 Update . Publisher: Warren, Gorham & Lamont.

• "Analysis and Valuation of Distressed Equity Securities" (with Mr. M. Travis Keath), Chapter 13F - Financial Valuation: Businesses and Business Interests - 1999 Update. Publisher: Warren, Gorham & Lamont .

"Analysis and Valuation of Distressed Equity Securities" (with Mr. M . Travis Keath), Valuation Strategies, September/October 1999, pp . 24-34. Publisher: Warren, Gorham & Lamont.

• Contributing author in The Art of M&A Integration : A Guide to Merging Resources, Processes and Responsibilities. October 1997 . Publisher: McGraw-Hill. Contributed on valuation of tangible and intangible assets (patents, trade secrets, customers , goodwill, employment agreements, non-competes , etc.), allocation of purchase price issues, accounting treatment of acquisitions, international valuation and transfer pricing and general valuation and due diligence issues. Assisted editor in commenting on and editing first half of text.

• Provided live and taped inte rviews pertaining to economic issues for television, including lengthy interviews for CNN (July 1990), WFAA-TV (July 1990 ; July 1991 ; March 1992), and radio (Internet radio on November 9, 1999, discussing Microsoft anti-trust issues) .

Lectures Presented

Dr. Hakala is a frequent public speaker on valuation, economics, ethics, and monetary policy . Examples include:

• "Valuation of Options for Litigation Purposes" - New York University CLE Presentation-October 200 0

• "Valuation Issues-Family Limited Partnerships" - Professional Financial Service, LP's Family Limited Partnership Alert and Update; Dallas/Fort Worth - February 2000

• "PPOs for Sale : the Valuation of Managed Care Entities" - Caesars Palace ; Las Vegas, Nevada - September 199 2

• "Equilibria in Continuous-Time Models of Money" - referred paper presented to the Sixth World Congress of the Econometric Society ; Barcelona, Spain - August 1990

• "The Use and Holding of Currency" - Feature Presentation - Western Economic Association Meeting ; San Diego, California - July 199 0

• "Values and Economics" - Dallas Philosophical Forum ; Dallas, Texas - March 1990

• "Ethics and the Role of Government" - ARCO Oil and Gas Research Center ; Plano, Texas - October 198 9

• "Continuous-Time Models of Money: Policy Implications" - paper presented to the Division of Research and Statistics of the Board of Governors of the Federal Reserve ; Washington, DC - January 198 8

Scott D. Hakala Page 3 Exhibit A

Expert Witness/Litigation Support

Dr. Hakala has undertaken various assignments involving litigation support and has testified as an expert witness. He has been qualified as an expert and has testified in both U .S. District Court and in U.S. Tax Court. The following is a list of testimony on record :

• Leonard Sauls,Jr. v. The Estate of William Lee Hatch, Jr., Deceased, et al.; In the Probate Court Number One, Travis County, Texas (Cause No. 75278-A) ; deposition testimony March 22, 2002 ; testified as to the measurement of lost future earning capacity, case settled before issuance of deposition transcript .

• Leland Stenovich, et al., vs. Spencer F. Eccles, et aI ; Third Judicial District Court, Salt Lake County, State of Utah (Class Action, Case No . 000907870); deposition testimony February 5 and 6 , 2002; testified as to standards of practice, fairness and adequacy of consideration in a class action lawsuit relating to the acquisition of First Security Corporation by Wells Fargo .

In re Computer Associates Class Action Securities Litigation; U.S. District Court for the Eastern District of New York (Master File No. 98-CV-4839 ); deposition testimony January 23 and 24, 2002 ; testified as to materiality, causation and damages in a securities fraud lawsuit.

• Pamela Graham Reeves vs. VIJ, Inc . d/b/a National Utilities Co./NUCO and Greer Industries, Inc. ; U.S. District Court for the Northern District of Texas-Fo rt Worth Division (Case No. 400=CV- 1671-BE); trial testimony January 9, 2002; testified as to market wages, current job market and likelihood of employment for an individual alleged to have been wrongfully terminated .

• Patricia E. Vincent and James R. Vincent v. Bank of America Texas, N.A. .; In the 68th Judicial District Court, Dallas County, Texas (Cause No . DV99-00745) ; testimony in hearing in December 2000 and trial testimony December 18, 2001 ; testified as to the proper calculation of interest on a home mortgage and common standards and practices for calculating mortgage interest .

• Joan C. Howard and Charles A . Anderson, on behalf of themselves and all others similarly situated . v. Everex Systems, Inc ., and Steven L . W. Hui, et al. .; U.S. District Court for the Northern District of California (Case No . C 92 3742 CAL); deposition testimony November 19 and 20 and December 17, 2001 ; testified as to materiality, causation and damages in a securities fraud lawsuit .

• Reinsurance International Services Company, L.L.C. v. Lambert Fenchurch Group Limited, et al. ; In the 98`x' Judicial District Court, Travis County Texas (Civil Action No . 99-00745) ; deposition testimony September 20, 2001 ; testified as to lost profits and lost business value experienced by a reinsur ance broker relating to allegations of misrepresentations and breach of duty .

• Robert Alpert, James Ventures, L .P., Markus Investments, Inc . and James Investments, Inc . vs. Innovative Valve Technologies, Inc., et al..; U.S . District Court for the Southern District of Texas, Houston Division (Civil Action No. H-01-076) ; deposition testimony September 19, 2001 ; testified as to materiality, causation and damages in a securities fraud lawsuit.

• Premier Lifestyles International Corporation vs. Electronic Clearing House, Inc. ; XpresscheX, Inc., et al.; Superior Court for the State of California, County of Los Angeles (Case No . BC230691); deposition testimony September 17 and 27, 2001 ; trial testimony November 27 and 28, 2001 ; testified as to lost business opportunities and damages arising from various causes of action .

Scott D. Hakala Page 4 Exhibit A

• In re Phycor Corporation Securities Litigation ; U.S. District Court for the Middle District of Tennessee, Nashville Division (Civil Action No. 3-98-0834); deposition testimony August 9 and November 6, 2001 ; testified as to materiality, causation and damages in a securities class action lawsuit .

• Ben Higbee and Bridgestone Healthcare Management, Inc. vs. Bridgestone Healthcare Management, Inc., . .. and David E. Sones; 101` Judicial District, Dallas County, Texas (Cause No. 00-7365-3); deposition testimony June 21, 2001 ; testified as to preliminary findings as to fairness of certain transactions involving a workers' compensation and rehabilitation business .

• Auto Wax Co ., Inc. v. Mark V Products, Inc...; U.S. District Court for the Northern District of Texas, Dallas Division (Civil Action No. 3-99 CV 0982-T) ; deposition testimony April 25, 2001 ; trial testimony June 29, 2001 ; testified as to the reasonable royalty and lost profits in a patent infringement and trademark infringement case .

• Robert K. Bell, et al. v. Fore Systems, Inc., et al..; U.S. District Court for the Western District of Pennsylvania, (Civil Action No. 97-1265) ; deposition testimony February 1, 2 and 14, 2001, as to the materiality of various alleged accounting misrepresentations and as to damages in a class action shareholder lawsuit .

• Scott Cunningham and Elizabeth Cunningham v . Gutierrez, Mitchell & Colmenero, L.L.P., et al. ; 201S` Judicial District, Travis County, Texas (Cause No. GNO-00849) ; deposition testimony January 12, 2001 ; trial testimony March 7, 2001 ; testified as to the economic loss and value to the owners of a temporary services business .

• Damron Auto Parts, Inc. v. Commissioner of Internal Revenue ; U.S. Tax Court (Docket No . 5661-00) ; testified in trial January 9, 2001 ; testified as to the maximum compensation payable to an officer of a company primarily engaged in auto salvage operations.

• John Armstrong and Dan Armstrong vs. American Home Shield Corp. ; U.S. District Court for the Northern District of Texas, Fort Worth Division (Civil Action No . 4:99-CV-169-Y) ; deposition testimony December 18, 2000 ; testified as calculations of incentives relating to an acquisition and subsequent employment agreements .

• Frank Roger., on Behalf of Himself and All Others Similarly Situated, vs . Sunrise Medical, Inc ., et al. ; Superior Court of the State of California, County of San Diego (Case No . GIC 756421); testified in deposition November 30, 2000 (Civil Action No . 98-C-0779); testified as to the professional standards ; adequacy and reasonableness of analyses and due diligence associated with fairness opinions, materiality of certain omissions and allegedly misleading statements associated with securities filings and a tender offer ; and appropriate measures of fairness in a private leveraged buyout with management participation.

• Donald A. Barnett, et al., vs. Glenborough Pension Investors, et al. and William Paden, et al., vs. Glenborough Pension Investors, et al.; Superior Court of the State of California, County of San Mateo (Case No . 392541); testified in deposition November 16 and 17, 2000 ; testified as to the reasonable basis and appropriateness of a fairness opinion issued by a financial advisor ; the materiality of representations by the defendants and the appropriate measures of damages suffered by the class of limited partners as a result of such statements and representations ; and as a result of alleged breaches of fiduciary duty .

• EPI Environmental Products, Inc ., v. In-Line Plastics, L. C., et al. ; U.S. District Court for the Southern District of Texas, Houston Division (Civil Action No. H-98-4209) ; deposition testimony October 10, 2000 ; testified as to the reasonable royalty and lost profits resulting from a theft of trade secrets and patent infringement claims .

• William Eric Graham, et al., on Behalf of Themselves and All Others Similarly Situated, vs. Taylor Capital Group, Inc . f/k/a Cole Taylor Financial Group, Inc., et al.; U.S . District Cou rt for the Northern District of Illinois, E astern Division (Civil Action No . 98-C-0779); deposition testimony September 25 and 26, 2000, as to the materiali ty of various representations and damages in a class action shareholder lawsuit ; deposition testimony December 11, 2000, on the standards of practice for fai rness opinions and appropriateness relating to two fai rness opinions .

Scott D. Hakala Page 5 Exhibit A

• Alice Kucera, Individually and as Next Friend of Sherry Quaid and Bobby Quaid vs. Kevin W Niblett,M.D., and Southwest Vascular and Surgical Group, P.A. ; 134" Judicial District Court, Dallas County, Texas (Cause No . 97- 09671); deposition testimony July 25, 2000; testified as to the economic loss and present value of a life care pl an for an individual resulting from a vaccination.

• In re: Southern Mineral Corporation, SMC Production Company, Amerac Energy Corporation, BEC Energy, Inc ., SMC Ecuador, Inc; United States Bankruptcy Court, Southern District of Texas, Victoria Division (Case No . 99- 60358-V2-1 1) ; testified in deposition on June 28, 2000 ; testified as to valuation of reserves and enterprise value of a company engaged primarily in the exploration and production of oil and gas reserves .

• Dave Henderson, Individually, And on behalf of David W. Henderson; David W. Henderson, Individually vs. Connaught Laboratories Inc. d/b/a Pasteur Meriewc Connaught, Rhone-Poulenc Group, and TMC Medical- Longivew, Ltd. d/b/a Taylor Medical Center; 124th Judicial District Cou rt, Gregg County, Texas (Cause No . 98- 1735-B ); deposition testimony May 15 , 2000; testified as to the economic loss and present value of a life care pl an for an individual resulting from a vaccination .

• W. Perry Copus, Jr. and Belinda Copus, vs. STB Systems, Inc .; 44th Judicial District Court, Dallas County, Texas (Cause No . 98-06234); deposition testimony April 14, 2000 ; testified as to the materiality of certain representations and the valuation and determination of measures of economic loss under claims by the plaintiff and counterclaims by the defendant relating to the acquisition of and subsequent performance of a business acquired by the defendant .

Brewers Quality Homes, Inc. vs. Commissioner of Internal Revenue Service; U.S. Tax Court (Docket No. 8222- 99); deposition testimony April 13, 2000 ; trial testimony June 14 and 15, 2000 ; testified as to the reasonable compensation of a manufactured home dealer.

• IMT, Inc. vs. Haynes & Boone, L.L.P., Jeffrey Becker and Timothy Powers ; County Court at Law No . 2, Dallas County, Texas (Cause No . CC-98-10075-b) ; deposition testimony April 11, 2000 ; testified as to the value of a license agreement associated with an anti-radiation device for computer monitors .

• Robert Thibodeau, et al., v. Great American Life Underwriters, Inc. et al. ; 1015` District Court, Dall as County, Texas (Cause No . 96 -13246 ); deposition testimony April 7, 2000; testified as to the materiali ty of certain representations and the valuation and determination of measures of economic loss involving the loss of rights to insurance commissions and ownership in a set of life insur ance policies .

• Maxwell Romotsky, On Behalf of Himself and All Others Similarly Situated, vs. Cameron Ashley Building Products, Inc., et al.; County Court at Law No . 1, Dallas County, Texas (No. 00-00971 -A); testified in hearing and qualified as an expert on certain issues relating to mergers and acquisitions on February 24, 2000 ; testimony as to the customary practices and fair bidding processes in proposed a buyout of a comp any.

• Norman Yourish, Kenneth Yourish, Bruce L . Daley and Tony W. Kim, On Behalf of Themselves and All Others Similarly Situated, vs. California Amplifier, Inc., Ira Coron, David Nichols, Michael Ferron, Arthur Hausman and William McKenna ; Superior Court of the State of California, County of Ventura (Lead Case No . CIV 173569, consolidated with CIV173981) ; testified in deposition February 10, 2000 ; testified as to the materiality of public statements and representations by the defendants and the appropriate measure of damages suffered by the class of shareholders as a result of such statements and representations .

• John Trickett vs . A.G. Edwards & Sons, Inc. and Lanier Lafitte ; U.S. District Court for the Northern District of Texas, Dallas Division (Civil Action No . 3-98CV2912-T) ; deposition testimony January 18, 2000 ; trial testimony August 2000 ; testified as to the valuation effect of a premature exercise of employee stock options.

Scott D. Hakala Page 6 Exhibit A

• Robert Stovall v. WRS Group, Ltd, et al., Jary M. Ganske and Shirley Ganske, Intervenors; U.S. District Court for the Western District of Texas, Waco Division (Civil Action No . W-99-CA-239); deposition testimony December 17, 1999 ; testified as to the standards of professional appraisal practice, including acceptable and unacceptable appraisal practices and assumptions, requirements that appraisers address and consider relevant information in an appraisal repo rt and ethical requirements for disclosure of relationships and conflicts by business appraisers .

• Payless Housing, Inc. D/B/A American Spirit Homes vs. Clayton Homes, Inc., CMH Manufacturing, Inc., and CMH Homes, Inc . ; U. S. District Court for the Eastern District of Texas, Texarkana Division (Civil Action No. 598CV365) ; deposition testimony December 14, 1999 ; testified as to effects of the reported order backlog on the financial condition, income, market and market share on five of the plaintiff s manufactured home retail locations .

• Stecher v. Stecher, Family Court in Dallas County, Texas ; deposition testimony December 1, 1999 ; testified as to the value of a physician's practice (case settled prior to issuance of deposition transcript) .

• Nicole Ameris, et al. vs. Consumer Credit Counseling Services of Greater Dallas, Inc., et al.; 95`1' Judicial District of Dallas County, Texas (Cause No . 97-00558- D); deposition testimony October 19, 1999; testified as to anti- competitive practices and anti-trust issues and issues of duties on the part of financial advisors and counselors and fair and adequate disclosure of potential conflicts and sources of remuneration on the pa rt offinancial advisors and counselors .

• Stell v. Stell; 324th Family Court, Tarrant County, Texas (Cause No . 324-245672-96); trial testimony October 12, 1999; testified as to the value and net tangible asset value of a tattoo business .

• National Foam Cushion Manufacturing, Inc. v. USF&G Specialty Insurance Co. n/k/a The St. Paul Companies Specialty Insurance Group, et al.; 38`x' Judicial District Court of Medina County, Texas, (Cause No . 9803-14365) ; deposition testimony October 11, 1999; testified as to value of carpet cushion manufacturing operations and impact of financial distress.

• Joe Long, et al. v. Wells Fargo & Company, et al.,; U.S . District Court for the Western District of Texas, Austin Division (Civil Action No . A:98CA751-SS); deposition testimony September 11, 1999; testified as to the loss in value in plaintiffs' shares in Wells Fargo as a result of the announcement of the proposed merger between Norwest Corporation and Wells Fargo after plaintiffs agreed to sell their equity in a Texas bank in return for receipt of common shares in Norwest Corporation .

• Ice Group Addison, Inc . et al. v. C. W. Davis Supply Company, Inc ., et al. ; County Court No . 4, Dallas County, Texas (Cause No. 97-7930-D); deposition testimony July 27, 1999 ; trial testimony October 26, 1999; testimony regarding lost profits suffered by an ice skating rink as a result of allegations of problems with the ice due to improper design or construction .

• Kenneth O. Hill, et al., v. St. John Knits, Inc., et al. ; Superior Court of the State of California, Orange County Lead Case No . 803090 (Consolidated with Nos . 803085, 803623, 804099, 904387 and 805977) ; deposition testimony April 19, 1999; testified as to the pricing, terms and fairness of a proposed management buyout of the Defendant corporation.

• Normandie Metal Fabricators, Inc. v. Commissioner of Internal Revenue; U.S. Tax Court Docket No . 2526-98; testified in trial March 2 and 3, 1999 ; testified as to the maximum compensation payable to two officers of a company that specialized in designing and manufacturing fabricated metal and related products primarily for baking and food handling.

Scott D. Hakala Page 7 A

Exhibit A

• George J. Cortes, Individually and Derivatively on Behalf of MCS/Texas Direct, Inc., v. John W. Windle, Jr., MCS/Texas Direct, Inc. and Alon R. Stephens, v. George J. Cortes, Individually (Cause No. 352-168681-97), District Court of Tarrant County, Texas, 352 d Judicial District ; deposition testimony February 4, 1999; testimony in hearing on September 10, 1999, and at trial on September 28 and 29, 1999 ; testified as to the fair market value of a direct mail processing and printing business as of various dates and under various assumptions .

• Tom Limroth and Jean Limroth vs. Scott Killpack, Latrese Killpack, Plastic Magic, Inc ., and Killpack & Limroth Plastics, Inc. d/b/a/ Superior Plastics (Cause No. 352-171839-97), District Court of Tarrant County, Texas, 352°a Judicial District; deposition testimony November 18, 1998 ; testimony at hearing December 4, 1998 ; testified as to the appropriate allocation of expenses between two affiliated companies, the value of each of two companies, reasonable compensation of the officers of those companies and the adequacy of returns to shareholders in a minority shareholder dispute.

• Stephen Cooper vs. Richard A. Rhodes, As Independent Executor of THE ESTATE OF CHARLES ("SAM') BRAUNAGEL (Cause No. 97-6047-B), District Court in Dallas County, Texas, 44`x' Judicial District, testified in deposition on September 8, 1998 ; testified as to the fair market value and fairness of a negotiated transaction involving the sale of common stock in a private company in December 1992 .

• Jeffrey H. Mims vs . Kennedy Capital Management, et al. (Case No. 97-30566-HCA-7) United States Bankruptcy Court, Northern District of Texas, Dallas Division, Honorable Judge Harold C. Abramson presiding ; testified in deposition on July 16, 1998, trial testimony September 11, 1998 ; rebuttal to plaintiff's experts on certain valuation, fairness, going concern and damage issues involving an entity that produces nutritional supplements .

• Bankers Insurance Company v . Department of Insurance (Florida) et al. (Florida Department of Administrative Hearings or DOAH Case Number 96-4938) : Administrative hearing in the State of Florida; testified in deposition June 26 and at trial June 30 and July 1, 1998; testified as to the arbitrariness and appropriateness of the outcome of a Request For Proposal (RFP) process to select insurance carriers to service the insurance policies issued and underwritten by the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA) .

• Derrell Childs vs. Malcolm Brachman, Jane McMakin and Northwest Oil Company, Inc. (Cause No. 97-00677-K) ; 192`x' Judicial District Court, Dallas County, Texas ; deposition June 4, 1998; testified as to the lost business income resulting from a personal injury to an accountant .

• LJ&J Corporation D/B/A Streetz, Foreman Office Products, Inc ., Jerry Apodaca, Individually and D/B/A Akard Shoe Repair, Dr. Diane B. Mosbacher and Dr . Matthew Bashoever, Individually and D/B/A/ Accent Optical, Sub Total Sub Shoppe, Inc ., and Gifts, Gifts, Gifts v. The City of Dallas v. Gibson & Associates, Inc. (Civil No. #:94-Cv- 2420-H); In the United States District Court for the Northern District of Texas , Dallas Division; trial testimony June 3, 1998 ; testified in rebuttal to plaintiffs ' expert as to the proper measure of damages resulting from the claims of the plaintiffs arising from the repair of Main Street in downtown .

• Cheryl Worden vs. Dale Bateman, Administrator of the Estate of John Michael Bateman, Deceased; (Cause No. 97-05007) ; 353`d Judicial District Court, Travis County, Texas ; deposition May 8 and trial testimony May 21, 1998 ; testified as to the proper measure of damages resulting from the personal injuries suffered by the plaintiff.

• Hour Messenger Service, Inc . v. Nextel of Texas, Inc. (Cause No . 96-421049) ; 190`x' Judicial District Court, Harris County, Texas; deposition April 6, 1998; testified as to the proper measure of damages resulting from the claims of the plaintiff in operating a courier se rvice.

Scott D . Hakala Page 8 Exhibit A

• Elenburg, et al. and Willow Creek Dairy v. McAlvain, et al. (Cause No. 9477); 271s` Judicial District Court, Jack County, Texas ; deposition February 25, 1998 ; testified at trial April 27, 1998, as to the value of a large dairy operation.

• FFP Operating Partners, L.P. d/b/a FFP Partners, Ltd. v. Jarman Services, Ind. D/b/a Jarman Inventory Services (Cause No. 153-162381-96); Tarrant County, Texas; deposition January 26, 1998; testified as to the losses sustained by FFP due to alleged problems with audits performed by Jarman of FFP convenience stores.

• Juan Corona and Juana Corona, and Minors v . Aaron Rutledge and Club Hospitality, Inc (Cause No. 96-07166) ; 193'' Judicial District, Dallas County, Texas ; deposition testimony December 8, 1997; testified as to lost income resulting from an automotive accident .

• Louise B . Barnes, Donor, v . Commissioner of Internal Revenue; U.S . Tax Court Docket No . 13850-96 ; testified in trial in late October 1997; testified in this and related gift tax matters regarding the fair market values of two affiliated local telephone companies and the appropriate basis for evaluating gifts of minority interests in the two subject companies.

• Reber v. Reber; Family Court District Number 360, Tarrant County, Texas ; testified in December 1997 ; testified as to the value of a defined pension plan .

• Exacto Spring Corporation v. Commission of Internal Revenue; U.S. Tax Court Docket No. 27152-96 ; testified in trial in October 1997 ; testimony regarding the reasonable compensation of the President and Chief Executive Officer of Exacto Spring .

• H Group Holding, Inc. and Subsidiaries v. Commissioner of Internal Revenue ; U .S. Tax Court Docket Nos . 6161- 91, 2012-92, 7994-93, 2423-95 and 8532-95 ; conducted interviews under oath of various Hyatt International employees and officers April and May 1997 ; trial testimony September 1997 ; testified as to the appropriate allocation of revenues between foreign subsidiaries of Hyatt International and the domestic parent and an affiliated corporation, Hyatt Corporation .

• In Re : The Harold C. Simmons Family Trust No . I and Family Trust No . 2 U/A January 1, 1964 ; In the Probate Court of Dallas County, Texas; Deposition testimony two days in September 1997 ; testimony as the appropriateness of a recapitalization of Contran Corporation and the fair market value of Contran Corporation as of December 31, 1991 and December 31, 1996 .

• Rydex, Ltd ; Michael Ryan; Ryan Industries, Inc.; and Permid, Ltd., Plaintiffs, vs. Norwest Bank Iowa, N.A., Defendant; (Law No. CL000-65483) ; In the Iowa District Court for Polk County; Des Moines, Iowa; deposition testimony June 30 , 1997; trial testimony December 1997; testified as to the losses sustained by the plaintiffs as a result of the failure of a bank to issue an approved SBA loan.

• Timberlawn Psychiatric Hospital d/b/a Timberlawn Mental Health Systems v . National Medical Enterprises, Inc., et. al. ; (Cause No. 94-9969-J) ; 191st Judicial District, Dallas County, Texas ; deposition testimony April 7, 8 and 9, 1997; trial testimony February 1998 ; testified as to the losses sustained by Timberlawn as a result of the actions of National Medical Enterprises and its affiliates and addressed issues of market failure in the health services industry, relevant markets for psychiatric hospital services, restraint of trade and attempt to monopolize .

• Linda Bollen v. Harry A . Spring (Case No. 249-5373-92); 249th Judicial District, Johnson County, Texas; trial testimony March 20, 1997 ; testified as to the lost earning capaci ty and lost earnings of Ms. Bollen due to a personal injury.

Scott D. Hakala Page 9 Exhibit B Exhibit C: Apple Relative Returns Index in 2000 (Returns Relative to Market Indices)

140

120

0 0 100 u 0 0 0 N 80 N C -+- Class Period ZCO -~- CAR Index 60

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20

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Date EXHIBIT C 1 MILBERG WEISS BERSHAD HYNES & LERACH LLP 2 WILLIAM S . LERACH (68581) THOMAS E . EGLER (189871) 3 401 B Street, Suite 170 0 San Diego, CA 9210 1 4 Telephone: 619/231-1058 619/231-7423 (fax ) 5 - and - PATRICK J. COUGHLIN (111070) 6 RANDI D . BANDMAN (145212) SYLVIA WAHBA (197612 ) 7 ELI R. GREENSTEIN (217945) 100 Pine Street, Suite 2600 8 San Francisco, CA 94111 Telephone: 415/288-4545 9 415/288-4534 (fax )

10 Lead Counsel for Plaintiffs

11 UNITED STATES DISTRICT COURT 12 NORTHERN DISTRICT OF CALIFORNIA 13 OAKLAND DIVISION 1 4

15 In re APPLE COMPUTER, INC . SECURITIES Master File No . C-01-3667-CW LITIGATION ) 16 ) CLASS ACTION

17 ) DECLARATION OF BJORN I. This Document Relates To : ) STEINHOLT 18 ) ALL ACTIONS. ) 19 )

20

21

22

23

24

25

26

27

28 1 I, BJORN I. STEINHOLT, hereby declare and state as follows :

2 I. Introduction and Qualifications

3 1 . I am a Principal at Financial Markets Analysis, LLC ("FMA"), an economic

4 consulting and valuation firm based in San Diego, California and Princeton, New Jersey . FMA

5 provides financial analyses and related economic consulting services to various clients and has

6 frequently been asked to prepare reports and expert testimony regarding the various economic issues

7 that typically arise in securities class actions.

8 2. I received a Masters in International Business from the University of San Diego and

9 a Bachelor of Science, Computer Science degree from California State University, Long Beach .

10 Furthermore, I have earned the professional designation Chartered Financial Analyst awarded by the

11 Association for Investment Management and Research . I have been retained on numerous occasions

12 to provide my expertise relating to economic issues similar to those in this litigation . A summary

13 of my background and qualifications is attached as Exhibit A to this declaration .

14 II. Overview of Assignment

15 3 . Plaintiffs' counsel has requested that I examine and elaborate on the reasons for share

16 repurchases by publicly traded companies . Specifically, I have been asked to review the share

17 repurchases by Apple Computer, Inc . ("Apple" or the "Company") from July 19, 2000 through

18 September 28, 2000 (the "Class Period"), and the inferences, if any, that can be drawn from these

19 repurchases.

20 4. My examination and conclusions are based on my professional experience, a review

21 of the academic literature as well as substantial amount of materials relating specifically to Apple

22 during the Class Period, including: a) First Amended Consolidated Complaint for Violation of the

23 Securities Exchange Act of 1934 ; b) Defendants' Notice of Motion and Motion to Dismiss

24 Consolidated Complaint ; Memorandum of Points and Authorities in Support Thereof, c) Apple's

25 filings with the Securities and Exchange Commission; d) contemporaneous press releases, analyst

26 reports and media accounts ; and e) trading information on Apple's common stock .

27 5. Based on my professional experience and an extensive review of the information

28 available to me, it is my opinion that :

DECLARATION OF BJORN I . STEINHOLT - C-01-3667-CW - 1 - 1 (a) The share repurchase program Apple implemented during the Class Period

2 was primarily designed to mitigate dilution from executive option grants, boost earnings per share

3 and support the stock price .

4 (b) The primary beneficiaries of Apple's share repurchase program were the

5 Company executives themselves due to the fact that the program was designed to offset dilution

6 caused by executive stock option awards .

7 III. Share Repurchases : Background

8 6 . First, in the following paragraphs I summarize the traditional reasons companies

9 repurchase their own shares on the open market. Second, I discuss the surge in repurchases during

10 the 1990s and some of the academic literature attributing this surge to many companies' increased

11 reliance on stock options to compensate corporate executives . Third, I examine the rationale behind

12 repurchasing shares in connection with executive stock option grants and the impact of such

13 repurchases on shareholder wealth . Fourth, I discuss how investors view the various issues relating

14 to share repurchases, using as an example, a letter to shareholders written by Warren Buffett,

15 arguably the most consistently successful investor over the past 45 years . In summary, the primary

16 motivation for share repurchases, in connection with executive option awards, is to mitigate dilution

17 from executive option grants, boost earnings per share and support the stock price in the short term .

18 Corporate executives themselves are the primary beneficiaries of such share repurchase programs,

19 often at the expense of long-term shareholders, as the true value of the repurchased shares is

20 generally only a secondary concern of the executives.

21 IV. Traditional Rationale for Share Repurchase s

22 7. Traditionally, there have been two commonly accepted valid reasons for a company

23 to repurchase its shares : (1) undervaluation of the company's common stock price, and/or (2) excess

24 cash flow. A company's rationale for repurchasing its stock when undervalued is obvious, as the

25 value of the shares received is greater than the cash paid, thereby increasing the value of the

26 Company. The second rationale relates to whether or not repurchases are preferential to other uses

27 of the excess cash, such as dividends or acquisitions . Many investors (see Warren Buffett discussion

28 infra) believe a company should only repurchase shares if its share price is undervalued and it has

DECLARATION OF BJORN I . STEINHOLT - C-01-3667-CW -2- 1 I excess cash flow to fund it. Early academic studies have found that such repurchases in the 1970s

2 resulted in positive abnormal returns on the announcement days .' In other words, investors viewed

3 such repurchases favorably, or as a signal of a favorable future outlook for the company . As

4 discussed further below, both the rationale for repurchases and investors' response to such

5 repurchases changed in the 1990s .

6 V. The Surge in Share Repurchases During the 1990 s

7 8 . During the 1990s, the number of publicly traded companies repurchasing their ow n

8 shares on the open market increased substantially. One academic study noted that share repurchases

9 by non-bank Standard & Poor's ("S&P") firms between 1994 and 1998 more than tripled to $150

10 billion, compared to an increase over the same time period in dividend payments of only 35% to

1 1 $115 billion.' Academics researching this phenomenon have found that the increase in repurchases

1 2 cannot be explained by the traditional rationales for repurchasing shares .' Another explanation, the

13 increased reliance on executive stock option awards as compensation, is commonly believed to be

14 the driving force behind the repurchasing boom in the 1990s . According to a 1998 research paper

15 by Christine Jolls:

16 The increased use of repurchases coincided with an increasing reliance on stock options to compensate top managers, and stock options encouraged managers to 17 choose repurchases over conventional dividend payments because repurchases, unlike dividends, do not dilute the per-share value of the stock . Consistent with the 1 8 stock option hypothesis, I find that firms which rely heavily on stock-option-based compensation are significantly more likely to repurchase their stock than firms which 19 rely less heavily on stock options to compensate their top executives .'

20

21

22

23 ' Vermaelen, 1981 . "Common stock repurchases and market signaling : an empirical study," Journal ofFinancial Economics; Dann, (1981) "Common Stock Repurchases : An analysis ofreturns 24 to bondholders and stockholders," Journal of Financial Economics .

25 2 Liang, Sharpe, 1999 . "Share Repurchases and Employee Stock Options and their Implications for S&P 500 Share Retirements and Expected Returns . " 26 3 See, e.g., Kahle, 2002 . "When a buyback isn't a buyback: Open market repurchases and 27 employee options . "

28 Jolls, 1998 . "Stock Repurchases and Incentive Compensation. "

DECLARATION OF BJORN I . STEINHOLT - C-01-3667-CW -3- VI. Rationale for the Share Repurchases in Connection with Stock Option Awards

2 9 . The rationale for using share repurchases in connection with executive stock optio n

3 awards needs to be examined in greater detail to fully appreciate the increasing popularity of share

4 repurchases over the past decade . During the 1990s, many corporate executives accumulated great

5 wealth largely as a result of the increasing use of stock option awards as compensation . A key

6 objective of using stock options to compensate corporate executives was to align the interests of

7 executives with those of the company's shareholders, i.e., both parties would have a stake in the

8 future performance of the company's stock price . A side "benefit" of stock option grants was that

9 they did not have to be expensed for accounting purposes . This meant that the portion of an

10 executive's compensation paid in the form of stock options did not impact earnings per share

1 1 ("EPS"), no matter how large the stock option grants were . A potential problem, however, was the

12 dilution that occurred later when the stock option awards caused increases in shares outstanding on

13 either a primary or fully diluted basis. This dilution did lower EPS . Share repurchases were well

14 suited to mitigate the dilution effect of executive stock option grants as the cost of these purchases

15 did not have to be deducted from earnings . In a Federal Reserve Board working paper written in

16 2000, Scott J . Weisbenner explained this particular issue . The paper stated :

17 Analysis of panel data for a sample of large firms suggests that firms conduct an ongoing repurchase of shares over the life of an option that undoes much of the 18 dilution to EPS that resultsfrom past stock option grants.

19 While current accounting standards do not require a firm's earnings to reflect the value of stock options granted to employees during the current year, they do attempt 20 to account for the potential dilutive effect of outstanding options on an existing shareholder claim on the firm . Reported EPS divides the level of earnings by the 21 sum of common shares outstanding and common stock equivalents, which are added to reflect outstanding dilutive securities . The granting of stock options will increase 22 the number of shares over which earnings are divided, thus diluting EPS . The cost of an option program is therefore ultimately reflected by an erosion of earnings per 23 share. This is important, as the EPS number is widely used to evaluate firm performance and determine stock valuation . Further, executive compensation may 24 also be tied in part to accounting measures, such as earnings per share .

25 In order to counter this dilution, the firm can repurchase stock . Repurchasing shares reduces shares outstanding, and the cash used to purchase the stock is not deducted 26 from earnings . In many circumstances, EPS will be boosted when a firm repurchases stock. Thus, an ongoing share buyback program can at least partially 27 undo the dilution that results from stock option grants, making the real costs firms are incurring from stock options less apparent . This illustrates why Charles Clough, 28

DECLARATION OF BJORN I. STEINHOLT - C-01-3667-CW -4- chief investment strategist atMerrillLynch, refers to share repurchases as "a pure earnings management scheme" (The Wall Street Journal, February 22, 1999).5 2 10. Many other research papers have supported Weisbenner's position that management 3 has an incentive to buy back shares in order to mitigate the dilution resulting from executive option 4 grants, thereby boosting EPS . Companies even buy back shares when these shares appear to be 5 overvalued . In an academic research paper titled "Stock Repurchases Associated with Stock Options 6 do Represent Dollars out of Shareholders' Wallets," written in 2001, Kenneth J . Klassen and Ranjini 7 Sivakumar explained: 8 Several recent studies have noted the phenomenal increase in open market stock 9 repurchases in the past two decades. In 1998, for the first time, total funds paid out via repurchases have exceeded those paid out in the form of dividends . Particularly 10 interesting has been the surge in repurchases over 1995-1999 during the soaring valuations and the drop in stock buybacks in 2000 when stocks were cheap . This 11 buyback surge has been accompanied by a rise in employee stock option awards and has been attracting an increasing amount of attention from the business press and 12 academics.

13 The combination of share buybacks and options has been termed lethal in Business Week (November 15, 1999) since options impose a cost on shareholders by diluting 14 a firm's existing equity. This article quoting Liang and Sharpe (1999) states that with executives' compensation tied to stock market performance, firms are willing to fund 15 buybacks and thus bolster stock prices even when stocks look overvalued . Furthermore, with companies trying to meet both buyback and capital spending goals, 1 6 companies are borrowing to finance buybacks amid a market boom .

17 11 . More recently, the nature of the share repurchases during the 1990s has also bee n

18 extensively discussed in the general press. A September 23, 2002 Business Week article titled "The

19 Buyback Boomerang : Stock repurchases can enrich execs at investors' expense," stated :

20 [I]n the go-go '90s, many buybacks made little sense. Companies spent huge sums - sometimes even borrowed to buy back their shares . At the market's peak in 2000, 21 they spent $216 billion to complete more than 5,800 buybacks. And those shares were often bought at the high. Worse, the buybacks couldn't stay ahead of the 22 growing number of cashed-out options : After a decade of huge buybacks, the number of outstanding shares remains about the same . 23

24 Investors must realize that they can't take buybacks at face value . Many repurchases 25 have been little more than costly attempts to jack up share prices and enrich execs .

26

27 5 Weisbenner (1998, revised 2000), "Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play ." (Emphasis added .) 28 6 Klassen, Sivakumar, 2001 . "Stock Repurchases Associated with Stock Options do Represent Dollars out of Shareholders' Wallets ." (Emphasis added .)

DECLARATION OF BJORN I . STEINHOLT - C-01-3667-CW -5- (Emphasis added.)

2 12. Based on the above, it is my opinion that the primary motivation for share repurchase s

3 in connection with executive option awards is to mitigate dilution from executive option grants,

4 boost earnings per share and support the stock price . Furthermore, it is also my opinion that the

5 corporate executives themselves are the primary beneficiaries of such share repurchase programs,

6 often at the expense of long-term shareholders, in that the true value of the repurchased shares is only

7 a secondary concern of the executives.

8 VII. An Investor's View : Warren Buffett

9 13 . Warren Buffett has arguably been the most consistently successful investor over th e

10 past 45 years. His investment skills have made him the second richest man in America, according

1 1 to Forbes (September 2002) . As a result, when Buffett speaks out about an investment issue, many

12 investors take notice . In his March 1, 2000 letter to shareholders, Buffett addressed the issue of

13 share repurchases . The letter stated:

14 There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds - cash plus sensible 15 borrowing capacity - beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated . To 1 6 this we add a caveat : Shareholders should have been supplied all the information they need for estimating that value . Otherwise, insiders could take advantage of their 17 uninformed partners and buy out their interests at a fraction of true worth .

18

19 When available funds exceed needs to those kinds, a company with a growth-oriented shareholder population can buy new business or repurchase shares. If a company's 20 stock is selling well below intrinsic value, repurchases usually makes the most sense . In the mid-1970s, the wisdom of making these was virtually screaming at 2 1 managements, but few responded . In most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued . Indeed, during 22 the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were large repurchases of their shares. This was often a tipoff that the company 23 was both undervalued and run by a shareholder-oriented management .

24 Now repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason : to pump or support the stock price . The shareholder 25 who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above 26 intrinsic value . Buying dollar bills for $1 .10 is not good business for those who stick around. 27

28

DECLARATION OF BJORN I . STEINHOLT - C-01-3667-CW -6- 1 I can't help but feel that too often today's repurchases are dictated by management's desire to "show confidence" or be in fashion rather than by a desire to enhance 2 per-share value.

3 Sometimes, too, companies say they are repurchasing shares to offset the shares issued when stock options granted at much lower prices are exercised . This "buy 4 high, sell low " strategy is one many unfortunate investors have employed - but never intentionally ! Managements, however, seem to follow thisperverse activity 5 very cheerfully.

6 (Emphasis added.)

7 14. Buffett's comments regarding the many company managers that in recent years

8 embarked upon share repurchase programs in their own self interest to "pump or support the stock

9 price," instead of showing a "desire to enhance per-share value," is a view shared with many

10 sophisticated investors . It is also consistent with my opinion rendered in this case .

1 1 VIII. Share Repurchases: Apple

12 15 . During the Class Period, Apple repurchased some of its shares pursuant to a

13 previously announced repurchasing program . To draw any inferences from these repurchases, it is

14 important to examine the context in which Apple decided to implement its repurchasing program .

15 Below is a summary of relevant events leading up to Apple's announcement that it was initiating a

16 repurchasing program, showing that the Company at that time was intending to significantly increase

17 its dependence on stock options as compensation of senior executives . This summary is followed

18 by a discussion of Apple's actual share repurchases during the Class Period, and what inferences, if

19 any, should be drawn from these share repurchases .

20 16. According to the Company's 1998 Proxy, as of February 2, 1998 Apple executiv e 2 1 officers and directors beneficially owned (common stock plus options exercisable within 60 days)

22 less than 185,000 shares of Apple stock, or less than 0 .1% of the 265 million Apple shares

23 outstanding.' In the same Proxy, shareholders were asked to approve the Company's new 1998

24 Executive Officer Stock Plan and the reservation of issuance thereunder of 34 million Apple shares .

25 The new 1998 Executive Officer Stock Plan signaled a substantial shift in Apple's executive

26 compensation policy going forward toward a significantly greater reliance on option grants . This 27

28 All share numbers are adjusted for Apple's June 21, 2000 two -for-one stock split . DECLARATION OF BJORN I. STEINHOLT - C-01-3667-CW - 7 - 1 I also meant that Apple's shares could suffer significant dilution and reduced earnings per share goin g

2 forward.

3 17. On July 14,1999, Apple announced a $500 million stock repurchase program . Given

4 Apple's stock prices in July 1999, $500 million was enough to repurchase roughly 20 million of the

5 Company's shares. The Apple press release stated:

6 CUPERTINO, California, July 14, 1999. Apple today announced a plan to repurchase up to $500 million of its common stock . 7 "Apple's Board of Directors believes that the Company's stock is a good long term 8 investment," said Steve Jobs, Apple's interim CEO . "We are confident in Apple's future and believe this repurchase program will produce long term benefits for the 9 Company and our shareholders ."

10 18. At the time of the share repurchase announcement , Apple had roughly $3 billion in

11 cash and short-term investments, so it certainly could afford to fund the new share repurchase

12 program. Securities analysts generally welcomed the announcement ofthe share repurchase program

13 as it was believed to "support the stock and help boost earnings ."' The actual reaction by investors

14 is more difficult to ascertain as the announcement was largely anticipated (Apple had previously

15 discussed a possible share repurchase program) and because the announcement coincided with an

1 6 earnings announcement . I conducted a preliminary analysis and found no statistically significant

1 7 price impact on Apple's stock price resulting from the repurchase announcement, when using the

18 NASDAQ Composite index as a benchmark.

19 19. In January of 2000, Steven Jobs accepted the position of Chief Executive Officer fo r

20 which he received 20 million stock options and an annual salary of $1 per year . In other words, the

2 1 compensation package for Jobs, was for all practical purposes entirely stock option based . In early

22 2000, Apple had about 320 million shares outstanding . Thus, Jobs' executive stock options

23 represented more than 5% of the entire Company stock float. In other words, the stock options

24 granted to Jobs, if exercised, would result in a significant dilution of the shares owned by the

25 Company's other shareholders .

26

27

28 8 Credit Suisse First Boston analyst report, dated July 15, 1999 . DECLARATION OF BJORN I . STEINHOLT - C-01-3667-CW -8- Jar,-81-08 12 :12pi Fros- T-006 P .11/11 F-241

1 20. Jobs was by no means the oily executive who received large stock option awards

2 under the 1998 Executive Officer Stock Plan. As of Janpaiy 31, 2000, more than 11 .5 million stock

3 options had been granted to Apple employees other than Jobs .

4 21. It is my wuderstsriding that, during the Class Period, Apple repurchased 521,18 3

5 shares. Total repurchases for the entire 4Q00 were approximately 550,000 shares ." This compares

6 to 2.5 million shares repurextased by Apple in 4Q99. Also, all of the share repurchases were

7 conducted early on in 4Q00, prior to August 4, 2000. There were no share repurchases from August

8 5, 2000 through the end of the Class Period on September 28, 2000. In other words, Apple decided

9 to: a) reduce the number of shares repurchased in 4Q00 from 4Q99, and b) refrain from reptachaswg

10 any shares following August 4. 2000. 11 22_ Based on my review of the facts in this case, it is my opinion that Apple initiated a

12 share repurchase program in connection with an increased reliance on stock option grants. The

13 Company's decision was thus lil ety motivated by its desire to mitigatedilution from executive option

14 grants, boost earnings per share and support the stock price. I find no evidence that the Company's

IS decision to repurchase shares in any way related to whether management believed its shares were

16 undervalued, or Overvalued. in the marketplace by investors . 17 IX. Conclusion 18 23. Based on the masons explained in greater detail above, as well as my professional

19 experience, it is my opinion that the share repurchase program Apple implemented during the Class

20 Period was primarily designed to mitigate dilution from executive option grants, boost earnings per

21 share and support the stock price; and the primary beneficiaries of Apple's share repurchase program

22 were the Company executives themselves . 23 I declare under penalty of perjury under the laws of the State of California that the foregoin g

24 is true and correct. If called as a witness, I could and would competently testify thereto. Executed

25 this 31st day of January , 2003, at San Diego, Californi 26 a7~ TSTEMKOLT 27 28 9 Apple's 4Q00, as well as FY00, ended on September 30, 2000. -9- DECLARATION OF AJORN 1 . ST lNHQLT - C-01-3667-CW EXHIBIT A Bjorn I. Steinholt, CFA

Financial Markets Analysis, L.L.C 4445 Eastgate Mall, 2"d Floor San Diego, CA 92121 Telephone : (858) 812-3152 • Facsimile: (858) 812-3302

Employment History

• 2000 - Present Financial Markets Analysis, LLC, San Diego, California

Senior Economic Consultant . Mr. Steinholt provides a broad range of capital markets consulting, including financial and economic analyses relating to mergers and acquisitions, initial public offerings, fairness opinions and private placements . His practice area includes the valuation of whole businesses, financial securities and intangible assets . Furthermore, he provides consulting relating to complex securities litigations .

• 1998 - 2000 Business Valuation Services, Inc., San Diego, California

Principal. Mr. Steinholt provided valuations of businesses and financial securities, including common stock, warrants, options, preferred stock, debt instruments and partnership interests, of companies in a myriad of industries . In addition, he performed valuations of intangible assets such as patents, trademarks, software, customer lists, work force and licensing agreements . Mr. Steinholt provided financial and economic analyses for a variety of purposes relating to mergers and acquisitions, initial public offerings, fairness opinions, bank financing, financial reporting requirements, tax-related issues, general advisory services and shareholder disputes .

• 1990 -1998 Princeton Venture Research, Inc., San Diego, California

Senior Vice President . Mr. Steinholt was a co-manager of Princeton Venture Research's San Diego office where he provided various financial and economic analyses for venture capital, investment banking and consulting assignments, including shareholder disputes . Among other things, he helped identify and evaluate prospective emerging technology companies in need of venture capital funding . In addition, Mr. Steinholt performed financial analyses related to market, industry and company economics and provided business valuation services involving different types of securities, including derivative securities . • 1988 - 1989 University of San Diego, San Diego, Californi a

Research Assistant -- Graduate Fellow. Mr. Steinholt assisted with research regarding the performance of international equity markets following the 1987 stock market crash . He also developed computer programs related to the portfolio theory, including risk minimization and portfolio optimization based on quadratic programming techniques .

Formal Education

• Master of International Business University of San Diego, 198 9

• Bachelor of Science , Computer Science Engineering California State University, Long Beach, 198 7

Accreditation and Affiliation s

• Chartered Financial Analys t Association for Investment Management and Research

• Sivilingenior - (Norwegian graduate level engineering designation) University of Trondheim, Norway

• Member, Association for Investment Management and Research

• Member, Financial Analysts Society of San Diego

2 EXHIBIT D AppleCare Document : 58694 Page 1 of 2

Store Switch Mac QuickTime ac OS is & c s r, + e base -. .., De me ,. _, zD s e+ssi s._ ._ ~+ +s M,a+ sr

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TITLE Article ID : 58694 Created : 8 1/ 15/00 : 10/3 1/00 Power Mac G4 Cube : Mold Lines in Enclosure Plastics Are Normal modified

TOPIC

This article explains the surface lines on the plastic enclosure of the Power Mac G4 Cube computer.

DISCUSSION

These lines are called mold lines, and occur when the enclosure is manufactured . These lines may appear on the enclosure's inside and outside surfaces . Mold lines are not cracks, and do not represent a weakness or defect in the plastic .

Document Information Product Area: Power Mac G4 Category: Power Mac G4 Cube Sub Category: General Topics

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TITLE Article ID : 88037 Created: 9/1/0 0 Power Mac G4 Cube : Troubleshooting : Power: Power Button Lights Up, Modified : 1/26/01 But Computer Does Not Turn O n

TOPIC

The DC-to-DC converter card in the Power Mac G4 Cube computer may move slightly out of its connector during shipping, causing the computer not to turn on when the power button is touched. This article explains how to reinsert the card to correct this issue .

DISCUSSION

Symptom

The computer's power button lights up when touched, but goes out as soon as you remove your finger, and the computer does not turn on .

Note: You may also notice the Power Mac G4 Cube starting up or shutting down by itself.

http ://docs.info.apple.com/article.html?artnum=88037 1/30/2003 AppleCare Document: 88037 Page 2 of 5

Product affected

Power Mac G4 Cube

Solution

Sometimes the DC-to-DC converter card may move slightly out of its connector during shipping, causing the computer not to turn on when the power button is touched . To correct this, the card needs to be pressed firmly back into its slot .

Warning : Read and follow the ESD precautions outlined in the'Working Inside Your Computer' section of the "About the Power Mac G4 Cube" owners manual .

To reinsert the DC-to-DC converter into its connector, follow these steps :

1 . Shut down the computer.

2. Remove all cables connected to the computer .

3. Remove the computer's core from the its enclosure by turning it upside-down on a soft surface, and pushing down on the latch .

Figure 1 . Removing core

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4 . Turn the computer so the video card is on top.

5 . Find the DC-to-DC converter card (pictured below in Figure 2) .

6 . Push down on the card to ensure it is securely in its connector .

~ .P"~ 1 et"..x ~~ s d ' J.

Awl

Figure 2 . Pushing the DC-to-DC converte r

7 . As shown in the photo, make sure the latch on the connector the card sits in is secure in the notch of the card.

Elm- I=- .

Figure 3 . Latch on connector

8 . Reinsert the core back into the enclosure, and push down on the latch until it locks into place. Note: The core fits into the enclosure only one way. The ports should face the back o f

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the enclosure.

low {

rte,.. -

Figure 4 . Reinserting core

9. Turn on the computer.

For further troubleshooting, refer to the troubleshooting section in the "About the Power Mac G4 Cube" owners manual.

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C Home ( personal use) C Business location (creative industry : film, TV, music, art, etc .)

C Home ( business use ) C Business location (all others )

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TITLE Article ID : 88044 Created : 10/3/00 Power Mac G4 Cube: Troubleshooting : Power: Random Activation of the Modified : 3/20/01 Power Button

TOPIC

This article describes how a small number of Power Mac G4 Cube computers may self-activate the power switch .

DISCUSSION

Power Switch Information

The power button of the Power Mac G4 Cube computer is designed to function by sensing changes of static capacitance when a finger touches it . Pressing the power button when : o the computer is off will turn it on. o the computer is on and awake will put it to sleep . o the computer is on and in sleep mode will awaken it. o the computer is on and awake or in sleep mode will cause the computer to shut down i f http ://docs.info.apple.com/article .html?artnum=88044 1/30/2003 AppleCare Document : 88044 Page 2 of 3

held for at least five seconds.

Symptom

A small number of Power Mac G4 Cube computers may exhibit the following symptoms without user interaction : o If the computer is on, it may turn off or go to sleep. o If the computer is off, it may turn on or wake up .

Note: This issue is distinct and separate from the random activation of the Apple Studio Display LCD (ADC) power button described in article 58736 : "Apple Studio Display LCD (ADC) : Random Sleep, Shut Down, Opening of Monitors Control Panel " .

Products affected o Power Mac G4 Cube

Solution

If your computer is experiencing any of the above symptoms, try the following steps : 1 . Make sure the computer is on a sturdy, flat surface . 2. Make sure there is nothing on the top of the Power Mac G4 Cube computer . 3. Check the settings in the Energy Saver control panel . The computer may be in sleep mode according to these settings . 4. Verify the power adapter is plugged securely into the Power Mac G4 Cube computer . 5. Verify the A/C power cord is plugged securely into the wall socket and the power adapter. 6. Remove and reinstall the DC-to-DC Converter card .

For assistance with this step, review article 88037 : "Power Mac G4 Cube: Power Switch-Lights-up, but Computer Does Not Turn On" .

7. The computer may require the replacement of the power button gasket . Contact Apple to determine if a gasket replacement is appropriate for your computer .

If following the above steps do not solve the issue, contact Apple for further troubleshooting assistance.

Visit the AppleCare Web site for directions on how to contact Apple at http :l/w,ww.ai)t)lc.com/suDoort,/PrQduct.s//overview- .htnil

Document Information Product Area : Power Mac G4 Category : Power Mac G4 Cube Sub Category: Troubleshooting Keywords : hts, kpmg4

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1 . How old is the computer you are troubleshooting/researching today ?

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2 . Have you already called Apple technical support regarding your question ?

( Yes C No

3 . Where do you primarily use your computer ?

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TITLE Article ID : 58798 Created : 2/22/0 1 : 6/7/01 Power Mac G4 Cube : Replacing the Power Button Gasket Modified

TOPIC

This article provides procedures for replacing the power button gasket on the Power Mac G4 Cube computer. Written and video instructions covering customer-installable parts are also available at http ://www .info.apple.com/installparts.

DISCUSSION

Be sure to carefully follow these instructions . Failure to follow these instructions could result in damage to your equipment and may void your warranty .

Replacing your computer's power button gasket requires five basic steps : o Turn off the computer. o Remove the computer core from the enclosure. o Remove the installed gasket . o Install the replacement gasket . http ://docs .info. apple.com/article.html?artnum=5 8798&SaveKC WindowURL= http%3A%2F . . . 1/30/2003 AppleCare Document : 58798 Page 2 of 4

o Reinstall the computer core in the enclosure .

Note: Written and video instructions covering customer-installable parts are available at http ://www.info.apple.com/installparts.

Tools Required o No tools are required for this procedure.

Electrostatic Discharge (ESD )

Static electricity, a normal and natural phenomenon, builds up on your body as you walk around. You experience an electrostatic discharge (ESD) when you touch an object and feel a spark. ESD can cause damage to the internal components of your computer . Avoid walking around while performing this procedure, and follow the instructions carefully when you are asked to discharge static electricity .

Removing the Computer Core from the Enclosure

1 . Place your computer on a clean, flat surface.

2. Shut down the computer by choosing Shut Down from the Special menu . Then wait five minutes for the computer's internal components to cool down .

3. Unplug all cables from the computer except the power cord .

Note: If you have never plugged in the computer, connect the computer's power cord and plug it in.

4. Turn the computer upside down on a soft clean cloth .

5. Touch the bare metal at the port access covers on the back of the computer .

Important: To avoid electrostatic discharge, always ground yourself by touching the port access covers before you touch any parts or install any components inside the computer. To avoid static electricity building back up in your body, do not walk around the room until you have completed the installation and closed the computer .

6. Unplug the power cord .

7. Push down on the latch to release it . Allow the latch to extend completely .

8. Gently pull the core from the computer enclosure and place it on a soft cloth .

Removing the power button gasket

The power button gasket is a small, flexible, gray ring . Place your hand in the computer enclosure and lift out the installed gasket .

http ://docs. info.apple.com/article.html?artnum=5 8798 &SaveKCW indowURL =http%3A%2F .. . 1/30/2003 AppleCare Document : 58798 Page 3 of 4

Figure 1 Removal of power button gaske t

Installing the New Power Button Gasket

1 . Insert the new power button gasket into the recessed area that encircles the power button.

2 . Press the gasket into place to ensure that it is secure.

3 . Install the computer core back into the enclosure as described in the next section .

Replacing the Computer Core in the Enclosur e

1 . Holding the core by the latch, insert the core into the computer .

Note: The core fits into the enclosure only one way . Position the ports on the core so that they are toward the back of the enclosure .

2. With a flat hand, press down on the latch until it locks into place . Firmly press the core to ensure it is fully secured within the enclosure .

Important: Do not lift or carry the computer by the core latch . The enclosure could fall off the core and be damaged .

3 . Turn the computer upright and reconnect all cables .

http://docs. info.apple.com/article.html?artnum=5 8798&SaveKCWindowURL=http%3A%2F .. . 1/30/2003 4. Restart the computer.

Warning : Never turn on the computer unless all of its internal and external parts are in place and it is closed . Operating the computer when it is open or missing parts can damage the computer or cause injury .

Document Informatio n Product Area: Power Mac G4 Category: Power Mac G4 Cube Sub Category : Troubleshooting Keywords : KCIP, kpmg4

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1 . How old is the computer you are troubleshooting/researching today ?

C 0-3 months C 4-12 months r more than 1 year

2. Have you already called Apple technical support regarding your question ?

r Yes C N o

3. Where do you primarily use your computer ?

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C Home ( business use ) C Business location (all others)

C School (K-12 and Higher Ed) ' Other location

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TITLE Article ID : 95146 Created: 6/7/0 1 : 6/8/0 1 Power Mac G4 Cube : Replacing the Enclosure Modified

TOPIC

This article explains how to replace the enclosure on the Power Mac G4 Cube . HTML/QuickTime video versions of the instructions are also available a t http://www. info. apple. com/instal lparts.

DISCUSSION

Be sure to follow the instructions in this sheet carefully . Failure to follow these instructions could result in damage to your equipment and may void your warranty .

Replacing your computer enclosure requires three basic steps : o Turn off the computer. o Remove the computer core from the enclosure. o Replace the computer core in the new enclosure .

http ://docs .info.apple .com/article.html?artnum=95146&SaveKCWindowURL=http%3A%2F .. . 1/30/2003 AppleCare Document : 95146 Page 2 of 5

Note: A video version of the replacement instructions is available at http ://www.info .apple.com/instal]part s

Tools Required

No tools are required for this procedure .

Electrostatic Discharge (ESD)

Static electricity, a normal and natural phenomenon, builds up on your body as you walk around. You experience an electrostatic discharge (ESD) when you touch an object and feel a spark. ESD can cause damage to the internal components of your computer .

Removing the Computer Core From the Enclosur e

Warning : Always turn off your computer before opening it to avoid damaging its internal components .

1 . Place your computer on a clean, flat surface .

2. Shut down your computer by opening the Special menu and choosing Shut Down . Then wait five minutes for the computer's internal components to cool down .

3. Unplug all cables from the computer except the power cord . Note: If you have never plugged in your computer, connect the computer's power cord and plug it in .

4. Turn your computer upside down on a soft, clean cloth.

iii,

5. Touch the bare metal at the port access covers on the back of the computer . Important: To avoid electrostatic discharge, always ground yourself by touching the port access covers before you touch any parts or install any components inside the computer . To avoid static electricity building back up in your body, do not walk around the room until you have completed the installation and closed the computer .

6. Unplug the power cord .

http ://docs.info .apple.comlarticle.html?artnum =95146&SaveKCWindowURL=http%3A%2F.. . 1/30/2003 AppleCare Document: 95146 Page 3 of 5

7. Push down on the latch to release it. Allow the latch to extend completely .

Exteme-C x.9,0,

8 . Gently pull the core from the computer enclosure and place the core on a soft cloth .

oaurr

Replacing the Computer Core in the New Enclosure

Holding the core by the latch, insert the core into the new enclosure . Note: The core fits into the enclosure only one way . Position the core so the ports are toward the back of the enclosure.

http ://docs. info.apple.com/article.html?artnum =95146&SaveKCWindowURL=http%3A%2F .. . 1/30/2003 AppleCare Document: 95146 Page 4 of 5

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2 . With a flat hand, press down on the latch until it locks into place . Firmly press the core to ensure it is fully secured within the enclosure . Important: Do not lift or carry your computer by the core latch . The enclosure could fall off the core and be damaged .

3. Turn your computer upright and reconnect all cables .

4. Restart your computer . Warning: Never turn on your computer unless all of its internal and external parts are in place and it is closed . Operating the computer when it is open or missing parts can damage your computer or cause injury .

Document Information Product Area: Power Mac G4 Category: Power Mac G4 Cube Sub Category: Troubleshooting Keywords : KCIP, kpmg4

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1 . How old is the computer you are troubleshooting/researching today ?

r 0-3 months r 4-12 months r more than 1 year

2. Have you already called Apple technical support regarding your question ?

( Yes ( N o

3. Where do you primarily use your computer ?

Home ( personal use ) r Business location (creative industry : film, TV, music, art, etc.)

Home (business use ) C Business location ( all others )

School (K-12 and Higher Ed) C Other locatio n

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TITLE Article ID : 59690 Created : 7/21/00 Power Mac G4 (Gigabit Ethernet) : Applications That Do Not Utilize Dual Modified: 9/3/00 Processors

TOPIC

This article explains how applications not optimized for dual processors run on a Power Mac G4 (Gigabit Ethernet) computer with dual processors .

DISCUSSION

An application that is not optimized to utilize both processors in a Power Mac G4 (Gigabit Ethernet) computer will function just as if it were running on a single processor computer .

Mac OS X, and applications written specifically for Mac OS X, are optimized for dual processing.

Document Information http ://docs.info.apple.com/article.html?artnum=58690 1/30/2003 AppleCare Document : 58690 Page 2 of2

Product Area: Power Mac G4 Category : Power Mac G4 Hardware Sub Category : General Topics Keywords : kpmg4

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